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Think Twice Before Co-Signing a Loan for your Child or Grandchild

With summertime in full swing, we’ll bet your college-bound children or grandchildren are starting to get really serious about how they plan to pay for the costs of their education. They may be thinking about turning to you for help.  For that reason, and as a general rule of thumb, we wanted to update a story we first brought you this time last year – a loud and clear warning against co-signing a loan for a loved one. In our experience, co-signing is a bad idea in just about every case.

Frequently in our AgingOptions office, in our LifePlanning Seminars or on our call-in radio programs we get questions about co-signing for someone else’s loan. Typically the borrower is a grandchild or adult child, and the person considering co-signing is full of loving intentions. After all, they’ll say, if I don’t co-sign, my child or grandchild won’t get the loan. The truth is, that may turn out to be the best possible outcome, because co-signing a loan can become a form of financial quicksand, trapping too many well-intentioned parents and grandparents in unplanned and often burdensome debt. If you don’t believe us, we suggest you read this article we found last year on the website of the New York Times. It’s called, “Thinking about Co-Signing a Loan? Proceed with Caution.” We couldn’t agree more.

Co-signing a loan is basically guaranteeing that the loan will be paid. If the borrower fails to make the payments, you as the co-signer are contractually obligated to pay off the loan. Co-signing is a fairly common practice, according to a survey cited in the New York Times article which said that about one adult in six has co-signed for someone else (typically a child, stepchild or grandchild). No doubt the borrowers usually intend to act responsibly. However, this same survey reports that nearly 40 percent of co-signers ended up having to pay all or part of the bill because the main borrower failed to make the payments.

The Times piece quotes Mr. Rod Griffin, an official with the credit bureau Experian, who reminds us that the reason the lender is demanding a co-signer is simple: the lender thinks the borrower doesn’t qualify for the loan.  “You’re vouching for the loan,” Griffin said, and “that’s a very high-risk thing to do.” If the lender is cautious, you should be, too.

While we mentioned education loans at the start of this article, it turns out, according to the survey, that about half of co-signed loans were actually car loans, while about one-fifth were student loans. In the case of student loans, the Times explains, some private lenders require a co-signer since they’re making the loan based on a student’s projected future earnings. Sadly, some parents or grandparents, according to the article, may think all they’re doing by co-signing is providing some sort of “character reference,” when in reality their co-signature obligates them to pay if the student defaults. This can come as a particular shock as student loan amounts can add up rapidly, creating a burdensome, even crippling debt.

The New York Times article goes on to explain that co-signing a loan can definitely affect your credit rating, even if the loan stays current, because it shows up as a debt obligation on your credit report. When you have more debt, it can cause you to have to pay higher interest rates when you borrow. What’s more, once you co-sign, getting yourself removed from the debt can be extremely difficult if not impossible. The article lists a few circumstances in which you may be able to get out from under the co-signer’s obligation, plus a few pointers that could help safeguard your interests before you co-sign. But our advice is to be very, very cautious, and avoid becoming a co-signer if at all possible. It may mean having a hard conversation with a loved one – but that’s better than facing your retirement years burdened by someone else’s indebtedness.

Being cautious about finances is important as you plan for retirement. But a good financial plan by itself will not ensure that you’ll experience the type of freedom in retirement that we all dream of. Your financial plan is only one facet of a comprehensive retirement strategy that we at AgingOptions call a LifePlan. Besides helping to keep you financially sound, your LifePlan also allows you to look ahead to ensure that your medical needs are met, your legal affairs are in order, your housing options have been considered and your family communications are healthy and open. With a LifePlan in place, you can look forward with confidence to a well-planned retirement that is both fruitful and secure.

The quickest and best way to learn more about the AgingOptions LifePlanning process is by attending one of our free LifePlanning Seminars. Bring your loved ones, and your questions, and come prepared for an enjoyable, information-packed event. Click here for dates, times and locations,  then register online or call us for assistance during the week. We urge you not to delay, because these popular events fill up fast and space is limited.

We’ll look forward to meeting you at a LifePlanning Seminar soon.

(originally reported at www.nytimes.com)