As a parent, you may be wondering about the pros and cons of cosigning a loan for your child. It's easy to be ruled by your heart when it comes to any decision about your children, but before you commit to anything, it's important to educate yourself about the loan process and what it could potentially mean to you.
Basic Terms of the Loan
It's important to know the following:
- By co-signing a loan, you are assuming a risk that the lender is unwilling to take. The lender does not have faith that your child is capable of paying back the loan. They are relying on you to make payments in the event that your child defaults.
- The lender can come directly to you and bypass the borrower completely if even one payment is missed.
- They can use the same tactics to demand repayment from you that they would use on the borrower, such as wage garnishment or the seizure of collateral.
- You could be responsible for much more that the principal of the loan, such as late fees or attorney fees.
Stop and Think and Read
Before you sign anything, make sure you think it through. Read over everything. Make sure you know your rights.
- Ask yourself if you can reasonably assume this debt. Is your credit good enough to even obtain a loan? Can you make payments if your child defaults?
- The loan will show up as an obligation on your credit report. Will you still be able to get the credit you need if you co-sign on the loan?
- If you do sign, make sure to negotiate your terms. Tell the lender in writing that you will only be responsible for the principal balance of the loan, not additional fees. Tell the lender to notify you in writing if the borrower is late or misses a payment. This gives you time to think of solutions.
- Get copies of everything you sign.
When Is Co-Signing a Good Idea?
Co-signing a loan may seem like a bad idea in general. But there are cases in which co-signing a loan may be a good idea:
- You can cosign for a private student loan for your child. This often helps your child establish credit, and a co-signer often lowers the rate of interest on the loan. In addition, the borrower can apply for a co-signer release after a certain number of timely loan payments have been made. This releases you from the debt entirely.
- Check into federal PLUS loans, in which the loan is made solely in your name. The funds are disbursed to the school strictly for tuition, etc. This takes co-signing out of the equation completely, (and a lot of emotional messiness too).
- If you are just absolutely certain that your child will pay the loan back, you may feel secure in co-signing a car loan or personal loan. Again, just make sure to think it through and know your rights.
You should look at co-signing a loan as taking out a loan yourself; after all, that is how the lender sees it. If this is a debt you can easily take on yourself, then go for it. The conventional wisdom is that you should (privately, of course) consider the loan a gift to your child. That way, if the money cannot be repaid, a lot of heartache and stress is removed from your relationship.
_____________________________Sarah Baker is a documentary filmmaker and writer currently living in New Bern, NC. Her first book, Lucky Stars: Janet Gaynor and Charles Farrell, will be published December 2009. Read more about her.