Debt – The Lowedown

Proverbs 6

¹My child, if you co-sign a loan for a friend or guarantee the debt of someone you hardly know—²if you have trapped yourself by your agreement and are caught by what you said—³quick, get out of it if you possibly can! You have placed yourself at your friend’s mercy. Now swallow your pride; go and beg to have your name erased. ⁴Don’t put it off. Do it now! Don’t rest until you do. ⁵Save yourself like a deer escaping from a hunter, like a bird fleeing from a net. (Proverbs 6:1-5, NLT)

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The Bible is a guidebook for living and the book of Proverbs, in particular, is written in order to provide instruction for living righteously and with “good conduct.” The author promises that those who read these Proverbs will grow in “wisdom and discipline.”

One area that is addressed throughout Proverbs is the area of finances and money management.

In this passage, Solomon advises the reader against the practice of co-signing a loan for another.

Solomon doesn’t mince words as he describes this scenario as a “trap” because you have placed yourself at your friend’s (or relative’s) mercy.

What does he mean and why does he say that? What’s the big deal?

Many people are unaware of the implications of co-signing a loan.

Co-signing a loan is not simply a matter of going into business with another person or becoming an equal investor in some financial venture.

When you cosign a loan with another person, you are essentially offering a guarantee to the bank that YOU will step in and honor the terms of the loan if the primary borrower cannot.

Co-signing a loan often occurs when the primary borrower (the signer) is deemed by the lender to be a credit risk, and therefore cannot qualify for a loan on their own for whatever they are purchasing.

There are any number of reasons why a person would not be able to qualify on their own for a loan.

One reason is that they don’t make enough money with their job to meet minimum standards the bank has set for income to debt ratios. In other words, based on basic loan standards, the monthly payment amount required for whatever loan the person might be seeking is too high relative to the amount of their monthly income. The bank has all kinds of statistics and predictors to evaluate various loan scenarios and they know that the higher percentage your payment is relative to your income, the more likely you are to default on a loan.

Another reason why a person might not be able to qualify for a loan on their own is because they have a poor credit history. A person’s credit score is a reflection of their ability to honor their financial commitments. Low credit scores often mean the person has missed payments in the past and/or they have too much personal debt. The lower your credit score, the more you are perceived by the lender to be a risky borrower – someone who has missed payments, made late payments or has completely defaulted on a loan.

So when a person finds themselves unable to borrow money, they may turn to a friend or relative to help them secure the loan by acting as a co-signer for the loan.

Solomon says that you shouldn’t put yourself in the position of being a cosigner. It’s incredibly foolish for a number of reasons.

When you co-sign a loan for another person, you are legally guaranteeing to the lender that if the primary borrower defaults, you will be responsible for the loan.

Why would anyone do that?

Think about it. If the bank won’t lend to the person on their own, why would they lend to them with you as a cosigner? The reason is because you have good credit and you are essentially vouching for the person in such a way that you’re putting yourself on the hook for that financial obligation should they default. If they are already deemed by the bank to be a person who cannot be relied upon to pay back a loan, they will STILL be unreliable even after you cosign. You will then be the guarantor for that loan.

In other words, cosigning a loan is incredibly foolish because there is a good chance it will become your legal obligation.

Horror stories abound when things go sideways after cosigning a loan. You may have creditors coming after you. Your wages could get garnished as creditors seek to recover unpaid payments, penalties and interest. Your credit score might get damaged as someone else’s debts and poor financial track record gets tied to you.

A poor credit score might impact your own ability to get a car loan or even buy a house, as lenders now view you as a borrowing risk, all because someone else decided that being financially responsible wasn’t important to them.

I know what you’re thinking…

“Shouldn’t we help people? Wouldn’t it be mean not to help a person who is in a bind? Shouldn’t we be Good Samaritans?”

Yes, it is a good thing to help people but not every course of action is helpful or wise. Helping another person does not mean you should do something foolish like guarantee their loan. Perhaps the best way to help a person is to force them to live in the reality of their financial situation.

Cosigning a loan for someone else has zero upside for the cosigner but the downsides are innumerable. This is why Solomon says it’s a trap. With absolutely no financial benefit to you, cosigning a loan has the potential to bring about tremendous personal financial ruin.

For a more complete list of possible downsides to cosigning a loan, see this article.

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Reflection

What are some reasons a person might ask you to cosign a loan?

On a scale of 1-10, how hard would it be for you to say no to a close friend or relative who asked you to help them by cosigning a loan?

If you gave a low value to the last question, meaning that it would be very difficult for you to say no to some people if they asked you for financial help by cosigning a loan, what options might be available to you to help ensure that you did not fall into this “trap”?

If a person were to come to you wanting you to cosign a loan (a friend or relative) what do you think are some options for helping them that would NOT require you to risk your own financial position by cosigning a loan?

Or put it another way….if you are the person in financial stress and you are wanting a loan that you cannot get, what options might be available to you BESIDES asking someone to cosign a loan for you?

Photo by RDNE Stock project: https://www.pexels.com/photo/close-up-photo-of-an-agreement-on-a-paper-7841821/

Not long ago, I was on a Zoom call with Edgar (not his real name), a Young adult I’ve had interactions with for the last couple of years.

Edgar was frustrated as things weren’t going the way he had planned. Already in his late 20’s, Edgar was still trying to figure out what his ultimate career would be. One option he was contemplating was grad school, the idea being that it would potentially set him up for a specific job/career he was interested in. But he wasn’t sure he wanted to spend more money on education given how much he had spent on his undergraduate degree and how little he had to show for it.

Many Young Adults are frustrated and disillusioned. Photo by Road Trip with Raj on Unsplash

Edgar was disillusioned. He told me that he felt like he had been sold a bill of goods. Education was supposed to be the avenue to success and happiness and yet, with mounting school loans and no solid, long-term career prospects, Edgar realized that his degree was not the golden ticket he had been promised.

Edgar is not alone. Today’s Young Adults are disillusioned about a lot of things. They are disillusioned about the economy and the “American Dream”. Especially here in California, many of the Young Adults we encounter have no expectation of ever being able to own a home.

They’re disillusioned with the world. They see inequity and injustice and they struggle to make sense of it all.

And many Young Adults are disillusioned with the Church, failing to see its relevance to modern culture.

Our culture is drifting further from its historic Christian roots and each new generation is experiencing less and less influence from traditional Christian teachings and morals.

Young Adults today have grown up in a post-Christian culture, meaning they know very little about who Jesus is or what Christianity is about. Spiritually, they are a blank slate.

Young Adults are increasingly irreligious in their views. Photo by Mitchel Lensink on Unsplash

About 1/3 of Young adults identify as atheist, agnostic or none. They’re not necessarily hostile to Christianity or religion, but they simply have no religious beliefs – it’s simply not important to them.

About 2/3 of Young adults identify as Christian but only 4% have a Christian ethic. Simply put, they consider themselves Christians but their lives don’t necessarily follow traditional Christian moral values.

This is not surprising since only about 6 out of every 10 Young adults believe the Bible is true.

Our culture has been heavily impacted and influenced by postmodernism, which is a philosophy that emphasizes a person’s personal experience as the supreme factor in determining truth. The end result is people who may identify with the Christian faith in a general sense but when it comes to moral values, their own experiences and preferences take priority over any biblical standards, which may be regarded as archaic and outdated.

How do we minister to people who are disillusioned and feeling hopeless when faced with the realities of life?

One of our strategies and priorities is to help Young Adults see that God is ultimately our only source of hope and His Word provides guidelines for successfully navigating life.

One of the ways we’re accomplishing this is by providing premarital mentoring to young Adult couples who are preparing for marriage.

With so much brokenness in families and marriage today, we’ve found Young Adults are eager to hear how biblical principles can help them change the trajectory of their relationships and family history by providing guidance and direction for fulfilling and life-long marriages.

Dave led a group of Young adults through a 9 month curriculum on Biblical Stewardship and Money Management

Another avenue for helping Young Adults see the value of God’s Word in their daily lives is by helping them adopt biblical principles for stewardship and money management. Unfortunately, our consumer and debt-oriented culture doesn’t teach Young adults how to handle money responsibly and many Young adults cite finances as a major source of stress and anxiety in their lives.

Young adults are looking for alternative solutions to experience financial security and experience prosperity. Many are surprised yet excited to learn that the Bible provides incredibly sound advice and wisdom on how to handle money and honor God through our finances and by applying biblical principles to our financial situations, we can experience financial peace.

Ministering to a generation that has become further removed from any biblical foundation is certainly challenging. But the Lord continues to move, directing us to Young Adults who are eager to know God and follow Him.

Thank you for your partnership that allows us to help Young adults begin to experience real spiritual life as they learn to apply God’s word to their lives.