The current economy has many parents turning to their adult children for help getting access to credit. But what are some of the dangers of adult children co-signing a parent’s loan?
Your parents can’t really afford the loan. If your parents have been turned down for a loan or credit card recently it is probably because they don’t have enough income to pay for the loan and/or their credit rating is poor. Co-signing a parent’s loan when they are obviously not financially fit enough to get approval from a bona fide financial institution means that you are taking on a risk that could put you on the road to bankruptcy.
Co-signing a loan or credit card for your parents could increase your debt-to-income ratio and lower your own credit score. Depending on how high the loan is you could end up owing debt disproportionate to your income. Credit card companies and other lenders you may be interested in doing business with may frown upon a high debt-to-income ratio and charge you higher interest rates, fees or refuse to do any business with you.
Your parents my refuse to repay the loan or credit card because they feel that you “owe” them. One of the biggest dangers of co-signing a parent’s loan is that the parent may simply refuse to pay it back. And since most adult children are not willing to send collections agents after their parents or sue them in court, they really have no way to enforcing their parents obligation to repay the loan. Thus, if a parent refuses to repay a co-signed loan, the lender can go after the adult child putting the co-signer at risk for collections actions and eventually bankruptcy if they are unable to pay the bill or fall upon financial hard times themselves.
