I’m going through a bunch of old links that I meant to write posts about, so if you’re wondering why I am writing about things written a year ago, that’s why.
Megan McArdle suggested, in the strongest possible terms, never to cosign for a loan:
When the primary borrower defaults, you’re on the hook, not just for the loan, but for any late charges or collection fees that may have accrued. If it’s a car, the repo man will sell it for cheap at auction, and then sue you for the difference–there are no “non-recourse” auto loans. Meanwhile, your credit will be trashed. Contracts don’t always include notice requirements for the secondary borrower, so you may not even find out about late payments until it’s in collections.
Even if they pay, the full amount of the outstanding loan will be counted against your debt-to-income ratios for the purposes of both calculating your credit score, and obtaining loans for yourself, since after all, you are responsible for paying it off. That may hamper your ability to get a mortgage or other financing.
If you can’t afford to pay off the loan, then–no matter how much you love them, how great your need, or how much you want to believe they will pay–you must “just say no”.
Moreover, many people mistakenly believe that cosigning makes them the payor of last resort–that they will be on the hook only after the collections department exhausts every possible effort to make them pay. This is almost the opposite of the truth. You are fully liable for the debt, and while my understanding is that it varies by state, in many places the collectors get to choose who to go after. Who do you think they will choose: the deadbeat with an empty bank account, or you, with your sterling credit and well-padded savings?
Now that I think about it, the vast majority of friends I’ve had that has had a parent cosign a loan for them have been friends that - though I love them dearly - I would never cosign for. I would, as McArdle suggests, loan them to money first. And probably write it off in thinking that I am never going to get it back.
Because my college was paid for and there was always a hand-me-down car if I needed one, I never had to take out a loan or refinance or consolidation for my parents to cosign. If I had needed a new-to-me car, and my parents didn’t have one, my parents probably would have used the opportunity to get something newer or nicer for themselves so that they would have a car to hand down to me. I would attribute this generosity to my parents’ nice income, but actually Julianne’s parents did the same thing. The only difference was that her parents would buy a car with a down-payment and five-year loan while mine would buy a less expensive car outright.
While my parents never cosigned on a car, they did cosign on my first apartment (that was how I found out how much Dad made, twice as much as I thought). McArdle doesn’t really comment on that, though a lot of what she’s talking about applies to apartments, too (and there is a discussion in the comment sections about how that is also not a bad idea). Really, though, I don’t know how I would have been able to get my first apartment otherwise. Somebody’s father was going to need to vouch for us. In retrospect, signing that was probably a hard thing for them to do because they didn’t want me to get an apartment. They wanted me to move back home. But that was not what I needed. And I am much better off for them having done so.