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Cosigning and Similar Concepts
It is definitely permitted for a Jew to co-sign as a standard Arev (guarantor) on a loan initiated by a public company. Being that the terms are that the lender will turn to the borrower for payment first, he is considered the borrower and the cosigner is merely guaranteeing the loan in the event of default. On the other hand, an Arev of the “Shelof Dotz” type (where the guarantor is fully responsible for the loan, regardless of the borrower’s state) is definitely rendered in Halacha as the borrower. Halacha views his relationship with the bank to be as if he himself has borrowed the funds being that he is the only address to which the lender may turn. He in turn “re-lends” the money to the actual borrower. This is considered as if the Jewish borrower is borrowing directly from his Jewish guarantor and is therefore prohibited. Therefore, even if the borrower sends the interest payment directly to the bank it is still prohibited being that he is merely satisfying the cosigner’s direct obligation to the bank, and in essence he is paying interest to his Jewish cosigner.
In regard to the middle type of guarantor there is a dispute amongst the Poskim as to whether or not it would be considered Ribbit. Most Poskim maintain that since the lender has the right to approach the cosigner first, if he should so desire, he is considered to be a borrower. Any interest payment paid to the bank would be considered to be satisfying the Arev’s obligation. Other Poskim write, that since the borrower is equally responsible, there would not be any Ribbit violation. Maran in Bet Yosef and others rule that one should not enter into such a relationship.
This Halacha plays itself out in many instances in today’s lending environment. Many times there is a borrower that does not have a healthy credit rating. When the borrower asks his friend or relative to co-sign on a mortgage or on a car loan, extreme caution must be taken to avoid the prohibition of Ribbit. One must analyze the terms of the loan documents and learn the exact responsibility of the cosigner, and use the above guidelines to ensure that he is not in violation of these prohibitions.
Yet another very common scenario is where an individual would like to purchase something using his friend’s credit card. Being that he does not want his friend to incur any expenses, the borrower agrees to cover any interest obligation the cardholder will have to pay the credit card company. This is prohibited according to all opinions. Since the legal obligation is solely the cardholder’s, he is considered the borrower and his friend is in turn borrowing those same funds from him. Therefore, it is prohibited to pay the interest, even if the payment is sent directly to the lender. The lender must understand that he runs a risk (of not being able to recapture the fees) when lending the credit card.