Cosigning loans for friends or family members can spell financial disaster and ruin otherwise healthy relationships. While it is not unusual for parents to cosign for a child’s student loans, car loans or even a mortgage, doing so can damage parents’ credit scores and leave them liable for paying off the entire debt plus interest. Consider the following facts before agreeing to cosign a loan or serve as a grantor for someone else’s debt.
- If the primary borrower defaults on a loan, the lender has the right to go after the cosigner for repayment and may go so far as to garnish the cosigner’s wages. Should the primary borrower pass away, the cosigner may be on the hook to pay off the outstanding balance of the loan, plus interest, late fees and collection costs incurred by the lender.
- The cosigner’s credit report will include the loan, line of credit or debt for at least seven years. Should a primary borrower make a late payment or default on a loan, it will be reflected on the cosigner’s credit score, and potential lenders may view the cosigner as a credit risk.
- Guaranteeing a loan for someone else requires considering faith and trust in the borrower. Know the primary borrower and consider why they are asking you to cosign. Are they just starting their careers and lacking a credit history? Or does the lender require your signature because the borrower is a credit risk?
- Consider alternative support methods, such as lending or gifting the loan amount directly to the borrower. For example, if your child lacks a credit history, you may consider adding them as an authorized user on your credit cards or applying for credit in their name and paying the charges they incur.
- Read loan documents before signing them, monitor the loan or credit payments, and keep communications open with the borrower to protect yourself should they default.
- Get out of the loan by having the borrower refinance it or close the line of credit once they build their credit score.
About the Author: Kathleen Marteney, CRPC®, is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with PWA Securities, LLC (PWAS). She can be reached at (800) 737-8804 or via email at info@provwealth.com.
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Kathleen Marteney is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Posted on October 31, 2024