stupid things people
smart people occasionally do stupid things. Most of these come under the
category, "it seemed like a good idea at the time," but they may
come back to haunt you and your credit later. Many of these are
signs of a precarious debt situation, and all are likely to make that
to mess up their
- Cosign for relatives. When you're asked to cosign for
someone, the creditor has determined that it does not trust that person
to repay the loan. The creditor insists on you putting up your money,
your property, your future income and your good name to guarantee that
the loan will be repaid. If your relative does not pay, the creditor
will come after you. The creditor does not have to try to collect from
the relative. If you do not pay it, and it will looks just as bad on
your credit as if it were a loan to you.
- Cosign for friends. It is said that the fastest way to
lose a friend is to loan the friend money. Cosigning may be even faster.
Imagine how you will feel about your friend if you get a call from the
creditor telling you that your friend has not made a payment in several
months and now the full balance of the loan is due--which you must now
pay. Imagine how your friend will feel when you try to make him or her
pay you back for the outrageous interest charges and collection fees
that you have had to pay.
- Borrow from 401k and retirement plans to pay off credit card debt.
These plans are there for your retirement. If you borrow from them while
you are working--with more income than you will have when you
retire--how will you pay your bills when you retire? If you do not repay
these loans, you will pay income tax on the money you have withdrawn,
plus an early withdrawal penalty. In addition, since these kinds
of benefits are usually protected in bankruptcy, borrowing on them
reduces the assets you will be able to keep should you have to file.
- Take out a second mortgage to pay off credit card debt.
Equity in your home is one of the few possessions protected from
creditors in Arizona and many other states. In most cases this
equity is protected even through bankruptcy. If you borrow on you
home, you will increase the monthly cost to stay in your home which
could result in its loss if your financial circumstances worsen. In
addition, you will be converting short term debt--debt which should be
paid off in a matter of months--into long term debt which will take
years, or even decades to pay off. Even worse, you may be tempted to
again run up the charge cards which you have been paid off so that you
have lost your equity in your home for nothing.
- Sell your car to someone who will be making the payments.
Unless the financing on your car is paid off, you remain liable on the
loan. If you sell the car expecting the buyer to make your payments you
take the risk that the buyer will default, or even skip town with the
car. You will still have to pay the loan. Just ask yourself,
"Why can't the person that is buying your car can't get his or her
own financing?" Maybe the banks don't think he or she will be
able to make the payments. Another question to ask yourself,
"Do you have more money to risk than the bank?"
- Lease a car. A lease is often the most expensive way to
"buy" a car. Of course, you are not really buying anything.
You are just renting the car, and when the lease is up you have to
return it in good condition with no more miles on it the agreement
Reports tells us that most dealers actively push leasing--and that
leasing offers "far more opportunities for dealers to make
Some simple math will illustrate one pitfall. You have to pay for every
mile you put on the vehicle over the mileage allowance specified in the
lease. Typically leases specify a maximum of 15,000 miles, but sometimes
this can be as low as 10,000 miles per year.2
If you put just 5,000 miles more per year than a 36 month lease allows,
and you have to pay 18 cents per excess mile, you will owe $2,700 when
the lease ends.
In addition, you have to return the car in good condition. One
fourth of leased customers that Consumer Reports surveyed reported that
"they faced lease-end charges, paying as much as $1,500 to replace
worn-out parts, including brakes and tires, and up to $1077 for
so-called excess wear and tear, including dents, scratches, and
If you have an accident during the lease it only gets worse. If
the car is gets stolen or totaled, your insurance will only reimburse
you for the car's market value. If that does not pay off the lease
and all of its charges, you will still owe the difference.
- Sell a home on an assumption or wrap. Just like the sale
of a car without paying off the loan, the sale of a home on an
assumption leaves you on the hook for the loan. Although Arizona's
anti-deficiency statute on home trust deeds may prevent you from having
personal liability on the first mortgage, it may still affect your
credit--and you probably will not be released from liability from a
second mortgage or a loan guarantee.
- Let car insurance lapse. If you have a financed or leased
vehicle, the contract requires that you maintain comprehensive insurance
on the vehicle. If you let it lapse, the secured creditor may purchase
insurance and charge you for it. The insurance which the lender places
on the vehicle is much more expensive that that you can buy, so expect a
sizable charge. Don't forget, you will be paying interest on the
insurance too. The insurance the creditor purchase is designed to
protect the creditor and not you, so you may have no liability
- Take cash advances on credit cards to make payments. This
is a sure sign of impending disaster. Since you are increasing
your debt, next month's payments will be even higher.
- Sell your car to a company that will lease it back to you.
If you need some quick cash and have a vehicle that has been paid off,
you might be enticed by advertisements offering you that cash for your
car but allow you to keep the car. Under this scheme, you sell
your car for 10 to 20% of its value, and lease the car back. You
get title back when you buy the car back before the end of the lease.
Arizona Republic reporter Pat Kossan
investigated those kind of quick cash advertisements in Valley
newspapers. He found that interest for the quick cash averaged
214% over 1 year, compared with 29.9% which high-risk, high-interest
finance companies might charge. If the interest rate sounds
outrageously high, it's only the beginning. He also found that
borrowers could be horrified to learn that they lost a car valued at
$7,000 or $9,000 for a $1,500 loan.4
Consumer Reports, April, 1998, p. 20. Back.
2 Consumer Reports, December, 1997, p.
3 Consumer Reports, December 1997, p.
Kossan, "Borrowing troubles? Quick cash for your vehicle title
Lease-back often leaves sellers no car, no money," The Arizona
Republic, February 14, 1999, p. A1 (Phoenix, AZ). Back.