Co-signing and your kids

What you need to know before you agree to back up your kid's bank loan

 

As a parent, you’ll do anything for your child. Whether it’s driving them to hockey practice at 6 a.m. or helping them move into their college dorm, your kids are your world and there’s nothing you wouldn’t do to help them get a head start in life.
Unfortunately, putting your kids first isn’t always the smartest thing to do when it comes to your personal finances.
This is especially true in the case of co-signing a loan for your child. While co-signing may help your son or daughter secure a lower rate (be it on their student loan, car loan, credit card, or mortgage), you might not be aware of the very real and very serious personal financial repercussions that could come from your love and support.

Know what you’re getting into

As a co-signer, you’re agreeing to all the risk with very little reward. In other words, just because you’re not driving the car that you’ve co-signed on doesn’t mean you’re any less liable. You’re actually more liable. This is because you’re the reason that your son or daughter could get the loan in the first place.
A co-signer becomes necessary when the person applying for the loan (your son or daughter) doesn’t have the credit history, reliability, or income needed to secure the financing themselves. As such, they’re relying on your credit score to secure the line of credit. Which is all fine and dandy…until they fall behind on their payments. As the co-signer, the lender will come after you first, not your son or daughter. Since your credit is higher, the bank is wagering that you’re more likely to pay up.
This is the case not just in loan default situations, but also in the case of illness, handicap, or death. Co-sign on a loan and you could be in danger of having your accounts frozen, your wages garnished, and your credit score lowered.

How co-signing can impact your credit score

It’s true that your credit score can benefit from co-signing on a loan, but the impact is miniscule at best, and only occurs if your son or daughter manages to make their monthly payments. (And really, since you qualified as a co-signer on the account, chances are your credit is already better than average. As such, adding another line of credit probably isn’t doing you a whole lot of good.)
Not surprisingly, your credit score has a much better chance of being negatively impacted when you co-sign an agreement. As a co-signer, the loan will automatically be reflected on your credit report. And, even though you’re not primarily responsible for the payments, negligence on the part of your son or daughter will still reflect poorly on your personal credit report.

Think long-term

You may feel inclined to help your child get a loan today, but what about one, two, or ten years down the road? Before you co-sign on a loan, think about your personal financial future. Will you need to tap into your credit sometime in the near future to buy a second car or finance home repairs? Co-signing for your child could make approval of a loan for yourself impossible. And what’s the point in having excellent credit if you can’t use it yourself?

Beware the catastrophic credit card slope

If you’ve recently dropped your son or daughter off to school, chances are good you sent them off with a plastic parting gift: a credit card. If you’ve agreed to be a co-signer on that card, you might want to keep a close eye on your child’s spending habits. While activity associated with a co-signed account appears on your credit record, you may not receive notice of late payments or any other negligence until it’s too late.
Worse yet, untangling yourself from a messy credit card situation can be next to impossible. In most cases, the only way to get your name off of a co-signed account is to pay off the balance completely and close the card. Worse, lenders typically don’t need to notify a co-signer if they raise the limit on a credit card once the primary cardholder is over the age of 21. So don’t assume that $500 limit will protect you. Four years from now, that limit could be $20,000 and as the co-signer, you’re still on the hook.

Finances and family never mix

Money issues can easily destroy relationships and parent/child bonds are no exception. Once you’re locked in as a co-signer, you’ll need to make sure that the primary party makes the required payments. Monitoring this can cause you stress and can easily grate on your relationship with your child. If things go really bad, and you’re stuck with a massive bill, you may even need to sue your son or daughter to force them to take responsibility. Remember, as the co-signer with excellent credit, you’re the first person the lender will sue in order to collect their payments. To demand the other party pay up, you may have no option but to bring them into a lawsuit…and that could make Sunday dinners a tad bit awkward.
Declining to co-sign on a loan with your son or daughter doesn’t mean you love them any less. Sometimes you just can’t jeopardize your personal financial future – including your ability to retire without baggage. Instead, take the time to talk to your child about their credit and financing options. Your relationship with your child (and with your bank account) will be all the better for it.

From: Goldengirlfinance.com/ Posted by Mags