As a parent, a common request from your grown children (other than babysitting the grandkids) is for your signature on a new loan.
Perhaps it’s your kid’s first house, a new vehicle – even a rental property. Whatever their endeavour, they’re all grown up and taking care of themself, so, granting this simple request is easy to jump into without much thought.
However, before putting pen to paper, it’s essential to consider the consequences of this action. Because, despite how straightforward it seems, co-signing on a loan can come with outsized consequences – on both your pocket book and your relationships.
To help you prudently navigate the decision to become a co-signer for your kids, we’re going to cover the possible consequences you should be aware of.
First, let’s define the term to ensure we’re all on the same page.
What is co-signing?
Every loan needs a signature. By leaving your personal mark, you enter a legally binding contract stipulating that you will repay the loan. For most loans, only one signature is required. However, for some, the lender (i.e., the bank) needs a little more security.
Co-signing offers that extra security. By adding a second signature to a loan agreement, it certifies that if the original debtor reneges on the loan, the second person – the co-signer – will take over payments and ensure the lender is paid back.
So, if you co-sign for your children, you have essentially made their debt your own.
Why do you need a co-signer?
Not all signatures are equal in the eyes of a bank.
For those carrying good credit scores and making a steady income, their signature holds a lot of weight.
But for those who’ve defaulted on loans, don’t have a credit history, or simply aren’t making “enough” money, their signature isn’t worth much credit to a bank.
Many young people who are just starting off on their own are plagued with a lack of income and credit history. This makes obtaining a loan difficult, and sometimes even impossible.
However, when a parent (or anyone with a good credit score) adds their signature to a loan, the doors open and possibilities bloom for youngsters.
That’s why co-signers are needed in today’s world of lending.
The dangers of co-signing on your children’s debt
We always like to think the best of our children, and when it comes to co-signing, it’s easy to assume your child will dutifully pay off any debt you’ve co-signed on.
However, even if your child follows through and pays the debt back (even without a single late payment), there’s more to co-signing than a signature.
Because co-signing makes your child’s debt your own, it can also affect your ability to take out loans in the future. Banks may consider you “over-extended” or maxed-out on debt.
And, if your child starts to have trouble with payments or defaults on the loan, the repercussions extend beyond adding an extra monthly payment to you.
When you end up paying for your child’s debt, it can create a rift in your relationship. This can add tension to every interaction, threatening the peace at family get-togethers like Christmas or Thanksgiving.
In short, co-signing on your grown child’s loan can have both financial and relational repercussions that could drastically impact your – and their – life.
When to co-sign for your child
There’s no simple answer to whether you should co-sign for your child. Because there are so many variables, including the child’s character, the manner of their debt and the amount of strain those payments could put on your economic health.
However, in certain contexts, co-signing can make a lot of sense.
If you are planning to take out a loan for your child (for example, a loan to cover university expenses) it makes sense to get them to apply for the loan, and for you to co-sign. This will help them build a credit score so that when they need to apply for a loan of their own, they already have a positive credit history.
This way, there are no expectations or requirements that risk souring relationships or cause unplanned strain on your finances.
When not to co-sign for your child
Because the stakes are so high, both monetarily and relationally, it’s best to be cautious when co-signing on a loan for your children.
If there is any doubt in your mind that your child will follow through on their promise to pay off a loan, you should seriously consider declining. Though it may be difficult at the time, it could save your relationship in the long term.
How to tactfully say no to co-signing for your child
Saying no to a request to co-sign can be harder than making the actual decision. The good news is that co-signing isn’t the only way you can help someone who wants to get a loan. If you’re asked to co-sign, but have doubts about it, you can politely offer your help via different means.
For example, if your child asks you to co-sign on a mortgage, you can instead offer to help them with their deposit. This way, they may be able to pay more upfront so they can get a loan that’s within their reach, and help keep your relationship, and your own finances, secure.