Why co-signing loans is bad personal finance

You think you’re doing them a favor. You’re really locking yourself into trouble.

Look, I know we want to help out those closest to us, particularly our kids. It seems natural, even appropriate, to want to co-sign a loan for one of our young adult children. Maybe you’re trying to help jump-start their credit — or maybe you’re helping them get into that car or other large purchase with the understanding they’ll pay you back in due time.

Not if the payments end up in ‘overdue time.’

I had a good friend who co-signed an auto loan for his son. He co-signed because his son’s credit — how can I put this? — his son’s credit is garbage. The two agreed to have the bank send the note to the son, and the son accepted the responsibility of paying it off each month. For the first few months, everything went as planned.

Then Junior stopped paying. The bank kept sending bills. The son kept ignoring them, his father none the wiser.

Then the bank sent something else: a tow truck. It repossessed the car. The whole event cost my friend dearly on his credit, all because he was just doing what he thought dads do.

I’m a dad, too, so I empathize with him. But each credit counseling source I have, including ClearPoint Credit Counseling Solutions, has told me co-signing loans is a risky practice that can almost certainly mess up your credit.

For one, if you co-sign a loan, the three credit bureaus will list you as the main debtor. If the other guy misses payments or dies, the lender can sue you, file a lien on your home and even garnish your wages if you can’t pay the bill.

Since the loan amount will be listed as your debt, it can hurt your debt-to-credit ratio. That could kill your credit score and make it harder to qualify for any new loans or credit lines.

No matter what the circumstances, my credit sources said you should never co-sign on a credit card. Some cards have adjustable rates. The APR’s start to soar over a few months. You have no control over what additional credit the card company may extend to the other guy. Suddenly, he has a larger balance he can’t pay. Guess who’s stuck with it?

Since the bill’s going to the other guy’s address, you may not even find out how bad things are until it is too late. Like my buddy did — as he watched his son’s car hauled down the street and his credit dragged through the mud.

The best co-sign is no co-sign, unless you are comfortable enough to cover the payments in an emergency.

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