SIGNED OFF: Is co-signing on a loan ever a smart idea·

Posted By: Matt in Loans on 06/19/2014 at 09:28:25

Take a moment and put yourself in this situation.

You're a parent, and your son or daughter are staring at you, hope in their eyes and optimism flowing through their veins as they ask you a question that, in their minds, will change the course of their life forever.

Will you help me buy a car or co-sign on a loan for me·

This inquiry might seem innocent in the moment, and some parents could barely give the question a thought and innately help their kids without considering the potential long term financial ramifications that could occur.

Co-signing for a loan typically is never a smart decision, even if your kids are the ones asking. What a lot of parents may believe is that co-signing absolves them of any real burden since they're not the primary borrow in this transaction.

That mentality isn't the right one since the co-signer still is obligated to pay the debt if the first person on that loan can't come up with the money, whether you're talking about a car or even something more substantial like a new home.

The need and wanting of parents to help their kids is admirable but also walks a fine line financially between heartwarming and questionable at best.

Truthfully, co-signing should be viewed like a credit card of sorts and only used in the event of an emergency, or if the parents fully understand and accept the situation at hand, and why they're needed as co-signers. Your son or daughter might need a car for college and having one isn't so much a luxury as it is a necessity, thus the need to co-sign for it.

What isn't quite as enviable are parents who watch their credit score plummet since their kids are missing car payments every other month, for example, or simply can't gather together enough to pay that mortgage.

In the end, co-signing is a huge red flag for all parties involved that you probably shouldn't be pursuing this particular loan at the present time. Needing a co-signer should tell the borrower that they're not qualified for whatever it is they're pursuing, and perhaps need a few more years of saving money or equity in hand to get what they want.

That may force them to start budgeting more carefully or cutting back on expenses. The co-signer option is an easy way to get what you want, without truly learning the value of a dollar as a result.

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