Co-Signing a Loan

As a credit counselor, I hear stories almost daily involving children and debt. Often, the story involves a parent or grandparent who has somehow gotten tangled in the debt of their child or grandchild. Usually, this is because they have co-signed or signed for a loan and the "responsible" borrower has not paid it back.

First, it is important to understand that when you co-sign a loan you agree to be legally responsible for that loan if the borrower does not pay on time. In some states, even if the borrower is just a few days late on payments, the lender can turn to you for repayment. Lenders are unconcerned if you tell them, "My son was supposed to pay this back!"

It is often difficult to turn down a plea for help from your child or grandchild. You might be asked to co-sign a loan or sign for a credit card.

When considering this, ask yourself the following questions:

1. Can I afford to repay this loan? If you are a co-signer and your child does not repay the loan, you will be held just as responsible for the payment.
   
   
2. Can I afford the effect this will have on my credit report? For example, if you are co-signer on a car loan for your grandson and then three months later you need your own new car, will you be turned down because you are loaded down with debt?
   
   
3. Can you deal with the emotional trauma you would surely feel if your child or grandchild bailed out on you?
   
   
4. Is this an emotional decision? Take a few days to truly consider the risks before you sign on the dotted line.
   
   

Remember, even if you are a co-signer only, that loan is your responsibility and will be shown on your credit file. It is essential that both you and the borrower understand fully the terms, risks and responsibilities involved.

Stephanie Pruett is a Certified Credit Counselor, Certified Consumer Interviewer, and Predatory Lending Counselor for Credit Counselors of Virgina and S.E. MD. Call her at 1-877-877-1995 (toll free).

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