Cosigning A Loan

Cosigning for a loan can be a touchy subject, especially for parents with adult children. There are quite a few risks to being a cosigner for your children, or basically anyone. But let’s deal with parents and children here.

As parents, we want the best for our kids. We want our kids to have everything that we never did have as a kid and we will do anything we can to give it to them. Let’s face it; everyone knows that it is difficult to get a major credit card or major credit if you are under the age of 21. Most establishments require a cosigner for under age adults. This is not only true for credit, but for being able to sign for an apartment or rent a home. Most people under the age of 21 do not have credit history and they need the help of Mom, Dad, Grandma, Grandpa, Aunt, Uncle, or other relatives to give them a hand up.

Before you so freely sign on the dotted line, you need to know what the Federal Trade Commission says. They estimate that three out of four cosigners are asked to repay loans because the primary borrower has defaulted on the loan. That’s an extremely high number of risk to think that you will be the one paying the loan back rather than your child. But, you say, my child is trustworthy. This does not mean that he is not a default risk.

Here are some questions that should be answered before you agree to sign:

· Can your child afford this obligation?

· How much of his paycheck will this debt represent?

· How does your child plan to cover this bill if he loses his job?

· If signing for a credit card, ask, “How will your child use this credit card”?

· If signing for a home/apartment, ask “Is your child responsible with their friends?” If the place gets trashed or damaged, you will become responsible.

You must also be aware that as a cosigner, the creditor considers YOU the main signer, not your child. Creditors will come after you for the debt the first time they do not receive a payment on time. Think, can you afford this debt on your plate?

Being a cosigner also affects your credit. Since creditors see no difference between a cosigner and the primary signer, they flag your credit both in giving the credit to begin with and if and when the credit goes into default for non-payment.

Now let’s say that you have looked at the risk and feel that you will have no problem being a cosigner. Depending on what you are cosigning for, put a limit to the amount you are cosigning for. If it is a credit card, limit it to $500- $1000. If it’s an apartment, get the parents of your child’s roommate to also be a cosigner. In the event the apartment is trashed, both parents will be responsible to pay for the damages. If cosigning a car, put both names on the title. If your child defaults on the loan, you have the option to sell the vehicle. Once the debt is paid in full, remove your name from the title.

Being a cosigner is not an easy decision. If you say no, your child will be mad at you. If you say yes, but really cannot afford it if your child defaults, you will be more strapped, and stressed. Do you really want this?

No matter what decision you make, your child will either love you at that moment or hate you at that moment. If they love you, kudos to you. If they hate you, it is only temporary. They will get over it and come back to loving you. They can’t live without you; after all, you are Mom and Dad!

Hope this helps you in making a rational decision. Personally, I would not be a cosigner. But I have family that have cosigned away. They have all regretted it later in life. But they say, “Its family”. That’s another matter for another day.

Until next time,

Janna