Dear Consumer Ed:

My daughter wants me to co-sign a loan for a car. If she is late on a payment, will this affect my credit, as well as hers?

Consumer Ed says:

Yes, when you co-sign on a loan, of any kind, both you and the borrower put your credit scores at risk.  If your daughter is late or misses a payment, this fact will be reflected on your credit reports and may negatively affect your credit ratings.  Any late or missed payment will affect your daughter’s creditworthiness as well.
   
There are a number of other responsibilities and risks that you might want to consider before you agree to this co-sign arrangement.  First, you need to understand that cosigning a loan is the same as guaranteeing a debt.  This means that if your daughter does not pay her own debt, you will then have to make the payments for her.  Second, in most states, including Georgia, if the borrower misses a payment, the lender can immediately collect from you as the cosigner.  Therefore, you should carefully evaluate your own finances and only co-sign on the loan if you can afford to pay off the loan plus any potential late fees or collection costs associated with the account.  
   
It is very common for parents to cosign on a child’s loan.  Assuming your daughter pays at least the minimum due every month, this arrangement will help her establish or re-establish good credit.  As her parent, you are better equipped to evaluate whether your daughter is financially responsible and if the terms of the loan are an economically feasible undertaking for her. 

If you decide to cosign on her loan, you should then take appropriate steps to protect yourself and your credit as much as possible.  One way to do this is to try to limit the terms of your obligation.  For example, you can request a contract that states, “The cosigner will be responsible only for the principal balance on this loan at the time of default.”  The lender is not required to consent to your request, but may if asked. You could also ask the lender to agree, in writing, to notify you in the event you daughter ever misses a payment, prior to effecting collection.  Early notification will help you prevent any potential problem from escalating to the point where you would be asked to repay all at once the entire amount owed.  Finally, get copies of all of the important documents involved in the transaction from either the lender or the borrower—the loan contract, Truth-in-Lending Disclosure Statement, and warranty.

If you enjoyed this post, make sure you subscribe to my RSS feed!