Understand Your Financial Situation Before Cosigning Your Child's Loan

By Gary Dunco, CFA, CFP®, CRPC®, APMA®, Private Wealth Advisor, Ameriprise Financial

As your child heads off to college or starts life as an independent young adult, he or she will likely face new financial responsibilities.

To manage these 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 a loan without a parent or another adult cosigning the loan.

Deciding to cosign a loan with your child is a noble gesture - but 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, such as the following:

• If any of the balance remains unpaid by the borrower, the cosigner is required to repay it.

• If the borrower defaults or misses even 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 can trigger “auto default” provisions in the loan contract. This requires the borrower to immediately pay the debt in full in the event of the cosigner’s death. Regulators discourage this practice, but it still exists in some loan agreements.

Steps to protect your position

Alternatives to a loan that requires a co-signature should be explored. For example, students should consider taking full advantage of federal student loans or aid. Parents may want to lend children money directly, if their financial situation allows doing so. Whether or not you’ve determined that you are willing to cosign a loan, take steps to help protect yourself. These include but are not limited to:

• Reading the fine print and fully understanding the terms of the loan, and the expectations of the lender.

• Avoiding pledging property (such as a car) to secure the loans, as this creates additional risk.

• Arranging to receive duplicate copies of all paperwork, such as statements, so you can monitor the borrower’s record of repayment.

• Having complete online access to the account, just as the borrower does.

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

Saukville resident Gary Dunco, CFA, CFP®, CRPC®, APMA®, is a Private Wealth Advisor and Certified Financial Planner™ practitioner with Ameriprise Financial Services, Inc. in Brookfield, Wis. He specializes in fee-based financial planning and asset management strategies and has been in practice for 32 years. To contact him, please call (262) 785-1010, visit his office at 16650 W. Bluemound Road, Suite 800, or go to http://www.ameripriseadvisors.com/gary.b.dunco.

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