Cosigning Loans: Good Idea or Bad Times?

Times can be tough for the younger generations. High unemployment and low wages can make it tough for them to be able to qualify for loans. More and more parents and other family members are being asked to cosign loans, but is this a good idea?

First, you have to consider your own finances when cosigning. When you cosign a loan, you are agreeing to pay the loan if the original borrower doesn't. Can you afford to make the payment? If not, the answer is simple: don't cosign! We are seeing more and more Social Security payments being garnished to pay student loans cosigned by parents (see this article)

Second, is the purchase absolutely necessary? I knew someone who cosigned for a niece new car. This generous aunt later decided to buy a new house and found her credit was damaged because the niece wasn't making payments. Turns out the niece didn't take care of the new car and it was sitting in the back yard, undriveable. The nice aunt had to pay up the loan before she could buy the house.

Was it absolutely necessary for the niece to buy a new car? She could have saved a ton of money by buying a used car. And given the way she treated the car she did buy, she would have lost less money. Turns out this purchase wasn't necessary and the aunt made a mistake in cosigning the loan. Needless to say, this makes family gatherings a little awkward.

Third, sometimes tough love is the best teaching experience. If they can't get a loan due to bad credit, not enough income, or high debt loads, getting themselves out of the position they are in will be a life lesson that just can't be taught.

Always treat a cosigned loan as a debt that you will have to pay off. If you can't afford to do it, you shouldn't be putting your name on the loan.