At some point it’s likely that a friend or family member will ask you for a financial favor. When this happens, you may genuinely want to help or you may also feel pressured to do so. In either case, you need to take the time to look at the financial favor being asked and determine if it can end up being financially fatal to your own finances:
Lending Money: It’s important to remember that the instant that you agree to be “YouBank” for a friend or family member, you’ll instantly change the nature of your relationship with the person borrowing money from you forever — and this change is usually not for the better. Even borrowers with the best intentions can end up reneging on their promises and there is always the chance that you will never get your money back. Even worse, your relationship with the borrower may sour due to the payback, or lack thereof, of the loan.
If you do decide to lend money to family or friends, it’s best to assume that you are giving a gift that will never be repaid.
Co-Signing Loans: If you decide to co-sign a loan for a friend or family member, you become equally responsible for repayment of that loan in full. If your friend or relative stops making payments on the loan for whatever reason, the bank will be knocking at your door for repayment.
The end result of co-signing a loan can be much worse than not having a personal loan repaid. Your credit record may be damaged by the primary borrower’s default which can affect your ability to borrow money for yourself in the future as well as affect your own credit card interest rates.
Authorizing Credit Card Users: If you have a credit card, you might consider helping a friend or family member that doesn’t have one by designating the friend as an authorized user of your credit card(rather than a joint user). While this may seem like a nice favor, be aware that you have just given the person carte blanche to use the card, yet they have absolutely no legal liability for payment. If they don’t pay, you’re stuck with the bill, and the bank won’t care what kind of private agreement the two of you had.
One of the worst case scenarios can be when a couple divorces and the settlement agreement stipulates that the authorized user will pay the credit card bill. If for any reason they don’t, you usually have no recourse with the credit card issuer because it’s not bound even by a legal divorce decree. You are still liable to pay the bills and any missed payments may adversely affect your credit.
In the end, you need to consider carefully the potential adverse consequences when someone asks you for one of these financial favors. If you don’t, it could turn out to be a fatal decision for your financial life.