Debt Smarts: Co-signing -- good deeds that don't go unpunished

Before you go, we thought you'd like these...
Before you go close icon

This is the first of a new weekly column by WalletPop's resident debt expert, Lita Epstein.

Two readers wrote in recently about situations where they tried to help out relatives. One was a mother who co-signed a student loan so her son could go to college. The second was a woman who took out an equity line for a relative so he could start a business.

In both cases the people who wanted the loan balked on making the payments and the women who thought they were doing a good deed are now screwed. They will have to pay off the debt if they want to keep their good credit rating and in one case, her home.

I hear this story over and over again from people thinking they are trying to help a friend or relative and instead end up with a mound of debt and often destroyed credit history. Don't co-sign on a loan or agree to take a loan for someone else who isn't able to qualify for that loan on their own. Often the reason is that they've already got a low credit score because they haven't been paying their bills.

There is one exception to that rule. If parents want to help their child get a start in life and assist them with getting their first loan, whether it be a car loan, a student loan or a credit card, then they should do so. But if you do decide to help, be sure that your child has the both the emotional and financial stability to make the payments. Be ready to make the payments if he or she doesn't, or your credit will be ruined.

When you co-sign on a loan you promise to make the payments if the person taking out the loan doesn't. As a co-signer you:

* Obligate yourself to loan payments if the borrower defaults

* May be denied a loan on something you want to buy because you've got outstanding debt as a co-signer.

* Live with the uncertainty of when you'll be stuck with the debt.

Unfortunately, if you go one step further, as one reader who wrote in did when she took an equity line on her home, you could also lose your home. This reader must make the payments or the bank will foreclose on the property. An equity line or equity loan is a secured loan, which means the financial institution that made the loan has the right to take the asset that was used as collateral if the payments aren't made.

Be debt smart. Don't co-sign on a loan unless you know you can make the payments should the person you are trying to help becomes a deadbeat and doesn't pay the money back.

Lita Epstein has written more than 20 books including the Complete Idiot's Guide to Improving Your Credit Score and The 250 Questions You Should Ask to Avoid Foreclosure.

Read Full Story
Credit Card Compare

Credit Card Compare

Whether you're looking for great travel rewards or low annual fees, find the card that's right for you.

Compare Now

From Our Partners