If you are the parent of a young adult, you may be asked to co-sign a car loan or apartment lease.
Before you agree, know what’s at stake – you could be putting your own financial security at risk.
WHAT COSIGNING REALLY MEANS
When you co-sign, you become fully responsible for someone else’s debt. If they don’t pay, you’re on the hook.
Even if they pay on time, being a co-signer can make it more difficult for you to qualify for credit because this debt is considered yours and creditors might consider you to be too long. If your child does not pay on time, you could suffer significant damage to your credit score. When putting your name on someone else’s debt, it’s a good idea to make sure that you can access the account information so you know if any issues are brewing.
“You have to prepare for the worst-case scenario, which is when the other person is unable to pay and they ghost you,” says Kelley Long, chartered accountant and advocate. consumer financial education for the American Institute of CPA.
Or maybe a sudden end to communication isn’t the worst. Long points out that you can find yourself at the Thanksgiving table with someone whose debt you are paying off, even if they have an Instagram full of vacation photos and you can’t afford to travel. Decide if you can prevent financial betrayal from ruining your relationship.
Although it has its pitfalls, co-signing can sometimes be smart. Lynnette Khalfani-Cox, CEO and Founder of Money Coach University, co-signed a condo with her daughter, now 23, four years ago. But that wasn’t giving in to puppy-eyed plea. “It was pure strategy,” she says, and it was a family decision.
Homeownership helped her daughter establish her residence in the state and stop paying out-of-state tuition fees. Khalfani-Cox and her husband, Earl, covered the down payment and closing costs, totaling about $ 25,000. They saved so much on tuition the first year.
Because the roommates’ rent covered the monthly payment, their daughter lived three years without rent. And the on-time mortgage payments helped her build good credit. She graduated, got married and got a job, then she and her husband insisted on paying rent. The young couple are looking for larger accommodation and Khalfani-Cox intends to rent the condo.
WHY DOES YOUR CHILD NEED A CO-SIGNATOR?
Lenders want co-signers when they cannot approve someone’s request on their own merits. The reasons are generally:
– Little or no credit history.
– Too little income or too much debt.
– A history of bad credit management.
When co-signing for an adult child goes wrong, it’s often because the young adult isn’t paying the way the parent intended, Long says. Relationships can be damaged and credit shattered.
Long recommends listing issues such as:
– Who will make the payments.
– What to do if someone cannot make a payment (this would affect both the credit scores of the borrower and the co-signer).
– If and when the loan will be refinanced in the name of the adult child.
Ultimately, however, the law won’t be on your side if your child doesn’t follow through.
WHEN CAN YOU SAY YES?
“If this is a payment that you’re going to make anyway, or that you’re willing to make, then the co-signing isn’t as risky,” Long says. For example, if you were still planning on paying for a car or a student loan, you could ask the young adult to apply. When their name is on the loan, the payments you make help them build credit.
There are also qualified yeses. Long suggests spreading the liability as much as possible if you are co-signing a lease. It could mean:
– Request for individual and co-signatory leases for roommates. Homeowners are often willing to do this, says Long. Co-signing for only your child’s portion protects you if roommates skip rent, damage property, etc.
– Distribution of responsibility for public services. You don’t want to be on the hook for all of them.
WHEN TO SAY NO
Khalfani-Cox says she’s generally against co-signing. “A lot of people looking for a co-signer haven’t proven themselves to be creditworthy or have had poor credit behavior in the past. If the bank isn’t willing to lend to them, I’m kind of like , ‘Why should you?’ “
If you see any signs that your young adult won’t handle credit responsibly, watch out. If the co-signing would put your financial security at risk, a soft “no” along with an offer of help in some other way, such as a one-time cash gift or groceries, may be wiser.