Tips for parents: Should you co-sign on a loan for you child?

A few things to consider while deciding whether or not you should co-sign on a loan for your child.

Does it seem like your kids are always asking you for money? If so, don’t feel bad… that’s what kids do. You have resources that they don’t have (like an income), and you’re the person that they trust in the most. It’s natural for them to come a-begging when they need something.

Unfortunately (or fortunately), kids grow up. The down side to this is that as they grow, so do their needs. Whereas they used to need a dollar or two to get a candy bar or a comic book, now they need ten, twenty, or fifty dollars for some new game or something for their bike. They’re hanging out with their friends more, wanting to eat fast food more, and it seems like you’re having to foot the bill.

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Tips for parents: Should you co-sign on a loan for you child?

Then comes 16. They can drive, they can work, and they’re bringing in money of their own… but it still seems that whenever the tank is empty, or they’re running low on cash, they still come crawling to you.

Of course, there’s nothing wrong with giving money to your children. After all, they are your greatest creation, and you want them to have the best. Sometimes, however, “The Best” has more of a cost than just the price tag.

To cite the classic example, let’s say that Bobby Jr. comes up to you and says, “I just found the car that I want. You should see it… it’s the best car EVER. I can afford the payments with what I’m making at work… {dramatic pause} but I need you to co-sign on the loan.”

For your child (who’s not so much a child anymore), the decision seems simple. After all, it is the “best car EVER”… and they’ve always come to you when they needed help in the past. Sadly, this is the part where things get tricky.

Should you do it? It doesn’t seem like that bad of an idea… after all, they’re going to be making the payments. All that they need is your signature. Of course, it’s never quite that simple, is it?

When you co-sign on a loan for your child, you’re basically letting them borrow your credit score for the purposes of getting what is often a much lower rate. You’re telling the lender that they’ll get their money, and that they can trust in your payment history. Once more, you’re putting yourself on the line for your children… but if you’re not careful, you could end up in quite a predicament.

Co-signing on a loan will get your child a much lower interest rate, thereby making the repayment of the loan much easier. Just remember that you’re name is on that piece of paper, too, so if Junior doesn’t pay, they’ll expect you to. Delinquent payments will not only get your child off to a bad start in establishing a credit history; they can also lower a credit score that you’ve worked your whole life to build. If your child loses their job, you may be left with payments for a loan that you’re not even seeing the benefit of.

That doesn’t, however, mean that you shouldn’t do it. After all, this is your son or daughter that we’re talking about. Before you make your decision, take time to look at all of the facts.

First of all, get a good look at the vehicle or whatever it is that they need the loan for. Make sure that it’s not overpriced, and that it’s in good shape. Treat is just as though you were buying it for yourself… after all, technically, you ARE buying it. See if you can get the price to come down a bit, or if there is a warranty available; anything extra or any reduction in price makes it a much better deal.

Also, shop around for the lowest loan rates before you sign. Chances are, if you initiate the deal you’ll be able to get a lower rate than your son or daughter, especially if done through a bank or lender that you’ve worked with before. If your son or daughter has a bank account from which automatic payments can be drafted, that can also help to get a lower rate.

Help your child to set up a budget and to figure out all of there expenses. Can they really afford to make the loan payments, figuring in other cost-of-living expenses? If they can’t, don’t buy the whole “well, I’ll just cut back on such-and-such” line… more often than not, they’ll fall behind in everything, and the loan will land squarely in your lap.

Finally, make sure that they know the importance of the decision, and that it’s not one that you can make lightly. If you can trust them to make payments, or at least their share of the payments, then let them know that you’ll consider signing. If you know that they can’t afford it, explain it to them and possibly help them look for a less expensive car. Don’t say “No!” and leave it at that… the whole process needs to be a learning experience for them.

Ultimately, the decision is up to you. Consider all of the options carefully before making it, and hopefully things will come out for the best in the end.

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