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Caring For Generations

Co-Signing Someone Else’s Loan May Not Be the Smartest Estate Plan

On Behalf of | Nov 2, 2016 | Uncategorized

“Here’s some good money advice: Don’t cosign someone else’s loan,” writes Jean Chatzky in the AARP Magazine. Chatzky cites a new survey from showing that:

  • 38% of cosigners lost money because the primary borrower defaulted
  • 28% saw their own credit score drop
  • 26% reported that their relationship with the borrower soured

What are some alternatives if you really want to help out?

  1. Help the borrower with a larger down payment on a car rather than cosigning for the financing itself.
  2. If the loan is for college, max out federal PLUS loans (where cosigners aren’t usually required) before looking at private loans. If you’re banking on being released as a co-signer after your child’s/friend’s credit situation improves, think twice, says Geoeff Williams in U.S. News. Consider this: the Consumer Financial Protection Bureau found that 90% of private student loan borrowers who applied to have their co-signer released from the contract were turned down.

If you’ve made the decision to co-sign despite all the cautions, Williams advises, take these steps to help yield a good outcome:

  • Set up email and text alerts to let you know when payments are due or late.
  • Arrange with the lender to be notified immediately before a default, so your credit isn’t impaired.

One mom took things a step further, Williams relates, making clear to her kids that if they missed one payment, she would have the bank repossess their cars.

At Geyer & Associates, discussions about to-dos and not-to-dos when it comes to helping adult children,including how to leave them assets as part of an inheritance, are an everyday occurrence.

“Most parents want to treat their children fairly, but this doesn’t necessarily mean they should receive equal shares of your estate,” says Reasons you may want to give more to one child than another include:

  • One earns much less money than the others
  • One child has been taking care of you during an illness
  • One has children with special needs

If you can afford it, your estate plan can include giving children some of their inheritance now, adds, particularly if their needs are pressing now.

Wouldn’t it be far better to give them direct help than to co-signing their loans?.