Generous to a Default

At least two or three times a year I will get a phone call from a client with questions about cosigning a loan on their child’s behalf.  Invariably, the parent has received a notice that their child has defaulted on the loan.  The client then proceeds to ask, “Could I possibly be on the hook for this?”

As much as I hate to be the bearer of bad news, I have to inform my client that yes, they are indeed on the hook for their child’s debt.

Usually, my client responds that they had to cosign the loan, otherwise their child would never have gotten the loan – and that’s exactly why they’re on the hook.

Without a cosigner, the lender considered the child a lending risk.  They either have a poor credit score, a bad payment history, have recently filed for bankruptcy, have too little income, or some other financial blemish in their past.  For that reason, the lender has little confidence of the child’s ability to repay the loan.  Therefore, the lender will only agree to make the loan if there is a cosigner.

I think some people perceive that cosigning on a loan is, in essence, vouching for their child that they’ll pay the funds back.  They think they’re basically signing a letter of recommendation.  I have to tell them that by cosigning on the loan, they’ve agreed to pay the loan back in full if their child defaults.  Some clients feel they should only be obligated to pay half because there were two signers on the loan.  But a cosigner is jointly and severally liable, meaning the lender can go after both signers jointly, or if one signer defaults, they can sever the bond and go after either signer for the entire loan.

Even if your child doesn’t default on the loan, there can still be consequences.  Cosigning on a loan shows up on your credit report and can lower your credit score because the loan increases your debt-to-income ratio.  If your child does make a payment late or misses a payment entirely, this shows up on your credit report.  Obviously, this can make it harder for you to borrow money yourself should you ever need to in the future.

Once you sign the loan documents, you can’t change your mind and take yourself off the loan.  You’re only in the clear after the loan has been paid in full.

Please, think long and hard if your child asks you to cosign for a home mortgage loan, a car loan, private student loans, or even a lease.  In the best case scenario, it affects your credit score; in the worst case scenario, you could end up paying back the entire loan.

So if your kid says he needs a cosign, instead of agreeing to guarantee his debt, impress him with your knowledge of trigonometry and say, “A cosine is the length of the adjacent side divided by the length of the hypotenuse of a right-angled triangle.”

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Reg P. Wydeven

Elder Law and Estate Planning Attorney at McCarty Law LLP
Hoping to follow in his father’s footsteps from a young age, Reg’s practice primarily consists of advising individuals on estate planning, estate settlement and elder law matters. As Reg represents clients in matters like guardianship proceedings and long-term care admissions, he feels grateful to be able to offer families thorough legal help in their time of need.

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