Should You Co-sign a Car Loan for Your Children?

Co-signing is one way to help your grown child to purchase a used or new vehicle. Whether this is a good idea depends on many factors, including their age, financial literacy, exposure to credit, and others. Weigh in all factors because you are 100 percent liable for loan repayment.

Co-signing and Other Options

Before co-signing for your son or daughter, you may think of other options such as adding them to your credit card. In essence, this will make them authorized users and will allow them to build a strong credit score over time. This is one way to help your grown child to build a solid report and meet the requirements for a car loan. There is a great post on the subject here. You can do this if your FICO score is in the range of 740 – 750 or higher.  Another option is to offer money for a larger down payment so that your child gets approved. If you choose to cosign, however, this is one way to help your child get affordable car financing. Whether it is a good idea to consign depends on the amount required and the terms of the loan. Obviously, parents know their children best – their responsibility level, work history, lifestyle, and how they deal with financial hardship. While auto financing companies, car dealerships, banks, and credit unions allow parents to consign on a vehicle loan, this is a hard decision to make. The lender will have the same claim on you and your child in case of default. There are some benefits to cosigning, however, and one is that timely payments help your child establish credit history. Check this great post about credit history and repair here.

Reasons Not to Cosign

Many parents are happy to cosign for their children or will at least consider doing it, but there are some things to consider. There are tax consequences in case the loan balance is settled. For example, if you settle for $5,500 and owe $12,000, the remaining $6,500 will show on your tax returns as debt forgiveness income. Another reason not to cosign is that it will make it more difficult to get approved should you decide to apply for a new loan. This might mean too much credit on your name and if you need a loan in case of emergency, the lender may turn you down when you need urgent cash. Obviously, suing your child if you get sued is unlikely option, and it is worth weighing the pros and cons before jumping on the bandwagon. If your child needs a car badly to commute to work and has a stable job, for example, you may lend a helping hand.

If you want your children to be successful financially you have to teach them how to use credit wisely. If your kids have had the misfortune of racking too much debt and acquired bad credit in the process, you should point out ways to get rid of debt, even if this means of getting a credit card for people with bad credit.

Author: Tammy

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