Children are often new to the credit world so need help establishing credit. To meet a lender's requirements, children often ask family to co-sign on a loan and the child will make the payments with their earnings. What is a co-signor? What happens if your child mismanages the loan and doesn't make the required payment?
A co-signor can be anyone with a positive credit history. A co-signor's commitment allows a child to qualify for a loan they wouldn't otherwise be able to afford. The co-signor's established credit is generally the reason a lender finds the loan to be less of a credit risk. Essentially, a “co-signor” is someone who agrees to be responsible for the debt along with the borrowing child. This is different than a “guarantor” who only agrees to pay if the child misses loan payments.
Before stepping into the role of co-signor, understand what that truly can do to your own credit standing if your child is unable to meet their responsibility with the loan. Being a co-signer for a friend or loved one implies a significant risk if they don't hold up their end of the bargain. Failure to repay their loan could significantly damage your credit score and hurt your chances of qualifying for a new loan or credit card in the future. If you co-sign, your child should agree to notify you if they aren't able to make the payments so that you can. If they don't and fall behind, the late payments will report on your credit report damaging your credit score.
Prior to agreeing to co-sign, your ability to comfortably pay the loan should be factored into your monthly budget. If you cannot pay this loan yourself, you should not co-sign. If your child is unable to pay, you will be required to step in and meet that financial requirement.
Consider for example, your child purchases a car and you co-sign a loan with him or her for its purchase. Your child then loses their job. Having no ability to pay the loan, your child stops paying and files bankruptcy. Embarrassed, he or she doesn't tell you. In most instances the bankruptcy will eliminate your child's personal requirement to pay the debt, but you will still be held responsible by the lender for the full loan as a co-signor. The late payments for the loan will show on your credit report and your credit will take a hit. This will affect your own ability to acquire credit in the future, out of no fault of your own.
Co-signing is a huge responsibility and one that shouldn't be taken lightly. Although we want our children to succeed and meet their financial milestones, often they are unable to do so. You should be diligent in your understanding of what it means for your financial well being if they are unable to meet their own financial burdens.
