Understand Your Financial Situation Before Cosigning Your Child’s Loan

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By Bennett Whitlock, CRPC®, Private Wealth Advisor

To manage new responsibilities, such as a car purchase, rent or college payments, your child may decide to take out a loan or another form of credit. Given their lack of credit history, it can be difficult for young adults to obtain loans without a parent or another adult cosigning the loan.

Deciding to cosign a loan with your child is a noble gesture, but it’s not a position to be taken lightly. Before you sign on the dotted line, consider your own financial situation.

Cosign with your eyes wide open

Even though you may not consider it “your loan” if you cosign, lenders will identify you as one of the borrowers. You may be at risk if different circumstances arise:

  • If any of the balance remains unpaid by the borrower, the cosigner is required to repay it.
  • If the borrower defaults or even misses one or two payments, it can detract from the cosigner’s credit record.
  • Even without a default, other lenders may look on this loan as an additional liability the cosigner will need to pay, which could also affect a cosigner’s credit record.
  • In some states, the creditor has the right to collect payment from the cosigner without first trying to collect from the borrower.
  • If the cosigner should die, it may trigger “auto default” provisions. This requires the borrower to immediately pay the debt in full in the event of the cosigner’s death.

Steps to protect your position

Whether you’ve determined that you are willing to cosign a loan, take steps to help protect yourself.

  • Read the fine print and fully understand the terms of the loan and the expectations of the lender.
  • Avoid pledging property, such as a car, to secure the loans as this creates additional risk.
  • Arrange to receive duplicate copies of all paperwork, such as statements, so you can stay on top of the borrower’s record of repayment.
  • Have complete online access to the account just as the borrower does.

When you are considering cosigning, treat the situation with the same diligence that you would if you were borrowing money yourself. Do what you can to help make sure your potential act of generosity doesn’t impair your ability to obtain credit in the future.

Bennett Whitlock, CRPC ®, is a private wealth advisor and managing director with Whitlock Wealth Management, a franchise of Ameriprise Financial Services, Inc. Learn more at WhitlockWealth.com or call 703-492-7732.

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