Survey finds tough consequences of co-signing a loan
We often hear that co-signing a loan to help someone get credit is a bad idea. Now we're learning just how bad it can be and the risk goes beyond getting stuck with the bill.
According to a new survey by creditcards.com, auto loans account for more than half of all co-signings. In many cases it's parents helping their college graduate child buy a car.
Auto loan co-signs were reported by 51 percent of consumers surveyed. 24 percent co-signed a personal loan, 19 percent co-signed for student loans,
and 15 percent helped someone get a credit card.
"About one in three people who co-signed a loan said it hurt their credit score," explained Senior Analyst Matt Schulz.
Schulz says the survey confirms that many people who co-sign with the best of intentions, fail to realize the the lasting consequences they'll face if things go wrong and payments are missed. Schulz says the survey found nearly 4 in 10 people get stuck paying all or part the bill.
"When you co-sign, you've got about a 40 percent chance of losing money," Schulz said. "And about a 25 percent chance of damaging the relationship with the person that you co-signed with- so that makes co-signing a really risky proposition."
According to the survey- half of those damaged relationships were between parents and their children or stepchildren.
Before you co-sign, make sure you have a full understanding of just what you're getting into- and do a full evaluation of the person's ability to keep up on payments. Ask the lender to make sure you will be notified of all late or missed payments, changes in terms, and any other changes on the account.
Bottom line: if you're not prepared to pay all or part of the loan yourself, don't put your credit score or financial stability at risk by co-signing.
For smaller loans, consider the alternatives. For example, instead of co-signing a credit card account, you can add your son or daughter as an authorized user on your card. Or give them a few hundred dollars to open a 'secured' credit card account where they're responsible for payments, there's a limit on what they can spend, and failure to pay means the money automatically comes out of the account's security deposit.