Your Adult Child Needs Money Help… Should You Cosign a Loan?

Today’s lackluster economy and slow job market has led to a growing number of adult children living at mom and dad’s house.

According to Pew Research Center analysis of U.S. Census Bureau data, 36% of the nation’s young adults ages 18 to 31—the Millennial generation—are living with parents. This is the highest percentage since the Great Recession of 2007.

Adult children are looking to their parents for financial help in record numbers. Many times this goes beyond merely providing food and shelter. Financial needs expand to financing a car, obtaining a first credit card, qualifying for an apartment lease, and securing student loans to stay in school.

Short on credit and employment history, more and more young adults are asking their parents to help them obtain financing by cosigning loans.

Between saving for retirement and financially supporting their adult children, baby boomers are feeling financially squeezed. Cosigning for loans adds another layer of uncertainty to mom and dad’s financial future.

The Pitfalls of Cosigning

Before you agree to cosign for any type of loan, consider the possible consequences.

• According to the FTC, default by primary borrowers runs as high as 75% depending on the type of loan. As a cosigner, you must be prepared to assume full responsibility for the debt.
• Short of default, cosigners seldom receive notice of a poor payment history until it shows up on their personal credit report.
• Cosigned loans appear as an obligation on your credit report, and may limit your personal ability to borrow.
• A cosigned loan that goes bad may destroy the relationship with the very loved one you were trying to help.

Advantages to Cosigning

• The one obvious advantage is you are helping a loved one obtain credit.
• A loan in lieu of gifting money keeps your retirement nest egg in place.
• A promptly paid cosigned loan may help your credit score.

Recommendations for Cosigners

• Either monitor the loan’s payment history through online access to the account, or duplicate statements.
• Monitor your credit report for any adverse history or change in your score.
• Plan an exit strategy. Make it a goal for the primary borrower to remove you as a cosigner by refinancing the loan as soon as his or her creditworthiness will allow.

The Final Word…

Here’s what Dave Ramsey, America’s personal money-management expert has to say about cosigning:

The bank wants a cosigner for a reason—they don’t expect the friend or relative to pay.

Think with me for a moment. If debt is the most aggressively marketed product in our culture today, if lenders must meet sales quotas for “loan production,” if lenders can project the likelihood of a loan going into default with unbelievable accuracy—if all these things are true and the lending industry has denied your friend or relative a loan, there is little doubt the potential borrower is trouble just looking for a place to happen. Yet people across America make the very unwise (yes, dumb) decision to cosign for someone else every day.

Additional Resources

Pew Research Center report.

Read Dave Ramsey’s cosigning advice in its entirety here.

We hope you found this article helpful. Please share your thoughts and experiences with fellow baby boomers in the comment section below.

All the best!

Editors – BommersKnowHow.com

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