Say 'No' to Co-Signing Loans for Family, Friends

This is a guest post by Lynnette Khalfani-Cox, host of the AARP Pay Down Your Debt Challenge, which is taking place on AARP.org through Jan. 29. Learn how to get started paying down your debt, join the Pay Down Your Debt group, and you could have a chance to win a prize.

Of all the financial mistakes that we can make - and later regret - loaning money to family and friends ranks perhaps among the biggest of them.

It's not that we don't want to help out those we love. Naturally, we do.

But lending money to relatives is fraught with challenges. What happens if the person doesn't repay on time? And even if a loan is repaid as agreed will the agreement cast a cloud over the relationship or upset the balance of power between family members in any way?

These are just a few of the problems that can emerge when one extends both heart and cash to the ones closest to us.

I remember a time - not too long ago - when one of my sisters was asked to loan money to one of our nieces, by co-signing a student loan for her.

I cautioned my sister not to do it, mainly because our niece hadn't yet shown the maturity and study skills that made me think she'd continue her college studies. I knew that by co-signing for that college debt, my well-intentioned sister could be left holding the proverbial bag. If our niece didn't pay, my sister's credit could be ruined and she'd be legally responsible for repayment of those loans.

Frankly, I felt bad suggesting to my sister that she should decline our niece's request. After all, I love my niece and wanted to see her succeed. I even recalled my own days in college when I struggled financially. If it weren't for student loans, which I obtained in my own name, I wouldn't have been able to complete my undergraduate or graduate studies.

Nonetheless, I've learned a lot about money since those days, particularly about family and finances. So I put on my " Money Coach" hat and gave my sister my best financial advice: "I know it's hard, but say no."

Well, my supportive sister - always the one in the family to give until it hurts - followed her heart instead of her head and co-signed for the loan.

Unfortunately, my worst fears (and hers) came true and our niece wound up dropping out of school, unable to pay her student debt. Needless to say, it wasn't pleasant for either of them.

Ultimately, our niece matured, got back into another college in another state, and resumed her studies. She's doing just fine. And so is my sister. But it was a hard lesson learned: Loaning money to relatives, whether via outright cash extended, or putting one's credit on the line as a co-signer, is risky business.

Sometimes it's best to simply muster up the courage to say "no" rather than risk serious damage to the relationship.

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