Your intentions are honorable: To help a son and daughter buy a car, with the added bonus of helping him or her establish credit. But co-signing on a loan to buy a car or for other reasons carries a big risk.
A new survey from CreditCards.com finds that 38 percent of co-signers had to pay some or all of the loan or credit card bill because the primary borrower did not, or was not able, to do so.
The poll also found that nearly half (45 percent) of co-signers have done so on behalf of a child or stepchild. Co-signing for a friend was a distant second at 21 percent.
“Once you co-sign, you are legally responsible for the debt,” Michelle Dosher, consumer engagement program manager for the Credit Union National Association, tells CreditCards.com. “It can be hard on you and it can be hard on family and friends if that situation doesn’t work out as it was intended.”
Another key finding. 28 percent of co-signers saw a drop in their credit score because the person they co-signed for paid late or not at all. Moreover, 26 percent of respondents said the co-signing experience damaged the relationship with the person they co-signed for.
Auto loans are likely the most popular form of co-signed loans because lending requirements can be much more stringent for getting a vehicle, compared to a store credit card, for example.
“With auto loans especially, when somebody doesn’t have a credit history it’s harder for that person to get a loan,” Dosher explained. “The co-signer helps you get that loan in the first place.”