While it is generally not a good idea to co-sign a loan for an adult friend or family member who may have well-known problems managing their finances, co-signing an auto loan (or apartment lease) for a son or daughter is a different situation. Should you do it? The answer is … it depends. It depends on the child. It depends on the car or apartment. It depends on the parent.
Parents already take on substantial and unprecedented financial commitments for their children age 18+. In the wake of the financial meltdown in 2008, lenders started requiring more parents to co-sign student loans along with their son or daughter. And – like all co-signing situations – that is a significant financial commitment with real consequences, including having to pay the loan if the student can’t or won’t.
The Wall Street Journal recently had a front-page story headlined, “Over 60, and Crushed by Student Loan Debt.” One father said he believes he will be “stuck” paying college loans for his two children’s educations into his 70s. “It’s a very dark cloud that’s always in the back of my mind,” he said.
So if you helped your kids with college, you may feel like you’ve done your part and you don’t want to co-sign for a car or apartment. Especially if your love for your children and your generosity are beginning to negatively impact your own finances. That’s certainly a reasonable reason to refuse to co-sign.
Of course, you may want your son or daughter to have a better car or apartment than they could get without your co-signing, and you may be delighted to co-sign for them. That’s perfectly okay too.
On the other hand, if your kid wants a better car or apartment than they can afford and you think they’re getting in over their head, you may choose to refuse to co-sign – especially if you believe there is any chance they will default. Because your credit rating will be at the mercy of your son or daughter making their loan or rent payments on time. But any past-due notices won’t be sent to you. And if they default, you could have to make the payments without any recourse to get them to sell the car or move.
For most young people, getting a car loan or apartment lease on their own is a first step toward financial independence. If at all possible, it’s probably right for you to encourage them to take that step.
Owning a car is more than just the car loan payments – there’s gas, upkeep, insurance, registration, annual inspections and excise taxes. Buying a car presents a great opportunity for parents to talk with their kids about the importance of making payments on time, setting aside money for related expenses and watching their mail for important communications from their lender, insurance agent and local & state governments.
For security reasons, many of those communications will only be sent by regular mail. And right now we’re seeing a lot of young people who believe that either nothing important ever comes by “snail mail” or that any important correspondence will be sent to their parents. Not true!
Follow-up: A Canton Citizen reader wrote and asked how they could be sure their financial information would not be used for co-signing on a second apartment their son had rented after his first lease (which the parent had co-signed) ended. I was able to assure them that a 2nd co-signing would require their consent, which they had not given. So all was probably fine.
They were also concerned about their financial information being “out there.” I urged this parent to contact both their son and the first landlord to be sure any financial information had been properly shredded or deleted after the son’s lease ended. A reputable landlord or management company would do that.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to email@example.com.