Almost 40% of people who co-sign on loans wind up covering some or even all of the borrower’s payments, according to a CreditCards.com survey of more than 2,000 co-signers.
Twenty-eight percent saw damage to their own credit scores, and 26% reported soured relationships with borrowers.
“I’m surprised it’s not more,” said Anthony Cherin, professor emeritus of finance atSan Diego State University. Co-signers expose themselves to financial risk: If the borrower misses payments, then the co-signer is on the hook.
The most common scenario reported in the CreditCards.com survey is that of a parent co-signing with a child for an auto loan: 45% of the survey respondents co-signed with a child, and auto loans accounted for 51% of loan co-signings.
“You’re betting on your child’s job and your child having the integrity, and also the means, to continue making payments on the loan,” Cherin said.
Cherin suggests parents avoid co-signing entirely. Instead, he said, parents could take on the role of a lender, buying or leasing a car themselves and requesting payments from their children.
Matt Schulz, senior industry analyst for CreditCards.com, said his father co-signed with him on a loan for his first car. Schulz was able to fulfill his financial obligations, but he sees more parents co-signing on loans and credit cards to help their children without a clear understanding of the risks.
“Co-signing for a credit card is not the only way to ease a child into responsible credit use,” Schulz said. “Instead, parents can apply for secured credit cards, putting down a deposit that also functions as the card’s credit limit.”
Requests for co-signing have become more common, he said, since the Credit Card Accountability Responsibility and Disclosure Act of 2009. The law requires credit card applicants under age 21 to either provide proof of income or to find a co-signer. Before agreeing, co-signers should request as much visibility into the applicant’s credit card account as possible, Schulz said.
“Can you get balance information? Will you be told if the credit line or interest changes, or if a payment is late?” Schulz said. “The quicker you can deal with these problems, the better off you’ll be financially.”
Should you co-sign?
Know The Risks – A borrower who misses payments can cost you money or damage your credit score.
Know The Borrower – Make sure they understand their responsibility to pay back the loan. Beware of borrowers without steady work or proven financial discipline.
Talk To The Lender – Request as much access as possible into the loan account. The sooner co-signers learn of potential problems, the sooner they can stop them from snowballing into financial disaster.
Consider Alternatives – There may be other choices that limit the financial risk to co-signers, such as loaning money directly to the borrower or putting down a deposit on a secured credit card.
Source: USA Today