Frequently in our office 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 asking the question is full of good intentions. After all, they’ll say, if I don’t co-sign, my loved one won’t get the loan.
That may be the best possible outcome, because co-signing a loan can be 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 recent article we found 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 recent survey cited in the New York Times article, with about one adult in six having co-signed for someone else, typically a child, stepchild or grandchild. No doubt the borrowers always have the best of intentions. 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 explains that the co-signer is signing the loan because the lender thinks the borrower doesn’t qualify for some reason. If the lender is cautious, you should be, too. “You’re vouching for the loan,” Griffin said, and “that’s a very high-risk thing to do.”
According to the survey, about half of co-signed loans were 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 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. Sometimes owing more money 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 is only part of the comprehensive approach to retirement that we call a LifePlan. We also help you 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.
Why not start the LifePlanning process by attending one of our free LifePlanning Seminars? Bring your questions and come prepared for an enjoyable, information-packed event. Click on the Upcoming Events tab and register for the seminar of your choice – but hurry, because space is limited. We’ll look forward to meeting you at a LifePlanning Seminar soon.
(originally reported at www.nytimes.com)