Monday, September 13, 1999
Co-signing loans can be risky
Defaults mar your credit
BY AMY HIGGINS
The Cincinnati Enquirer
Against her parents' warnings, Denise Brooks co-signed on a loan to help her son buy a used Honda Civic in 1992. Because he defaulted on the $8,000 loan, it's a mistake she's continuing to pay for — in the form of an extra $50 a month tacked onto her own car payment.
“I've never experienced anything like this,” Ms. Brooks said, adding that her own credit had been spotless before. “You think you know your kids ...”
Knowing your children is one thing, but knowing the full risks of co-signing a loan is another, experts say. And before deciding whether to co-sign or offer that friendly little loan, people should know what they are getting into.
Consider a few facts from the Federal Trade Commission:
• Co-signers are required when lenders don't trust the borrowers, either because of poor or limited credit history.
• Three out of four co-signers are asked to pay a co-signed loan if it goes into default.
• A lender can collect from the co-signer before going af ter the borrower who has missed a payment.
By co-signing her son's loan, Ms. Brooks guaranteed that she could and would repay it if her son did not. Mary Hurlburt, credit educator with downtown's Consumer Credit Counseling Service, said lenders treat a co-signer just like the primary borrower — if the loan is not paid, both credit histories are equally damaged.
“The co-signer gets absolutely nothing out of this arrangement but the borrower's good will, and they are risking a lot,” Ms. Hurlburt said.
Because Ms. Brooks could not pay the loan, her son's car was repossessed — and her credit report continues to be marred. That default has made her a higher credit risk, so her bank charges higher interest rates for her own car payment.
Not all co-signing stories have unhappy endings, however. Lois Ille of West Chester has put her own paid-off car up for collateral for loans for two of her adult daughters. She said both daughters were working hard to get out of credit card trouble they got into during college.
“Kids today, we live in a plastic society — they get in over their heads, regardless of the advice we try to give them,” said Ms. Ille, who also has three other children. “It was our way to help them get back on their feet and get a fresh start without costing us a lot of money.”
She said she made her children understand the loans were still their responsibility to pay off. When her older daughter, Terri Dotson, was late on a few payments, the bank called Ms. Ille.
“Our deal was that you would pay it if I signed, and I don't have the money to make your payments,” Ms. Ille recalls telling her daughter, who promptly made the loan payment. “She didn't realize the bank would call me that quickly.”
Not all lenders do notify the co-signers immediately, and that can lead to some of the horror stories that Ms. Hurlburt has heard at Consumer Credit Counseling. She relates the story of clients who filed for bankruptcy because their son, the primary borrower, lost his job and could not make his truck payments. By the time the parents knew about it, the truck was repossessed, and there was nothing they could do about it.
Ms. Hurlburt recommends that if people choose to co-sign, they should stay involved and take steps to make sure the loan is repaid.
“Have the borrower pay them and then the co-signer takes the payment to the bank,” she said. “Or get the borrower's codes and call the bank themselves to be sure payments are made. Some banks will automatically notify the co-signer, but others don't.”
Denise Brooks said even taking those steps couldn't get her to guarantee another loan. The first time around, she had heard all of the warnings but thought her son would be responsible for the loan.
Most of the warnings she had heard came from her parents. For years, she had heard that her mother as a child spent a Christmas without any presents after Ms. Brooks' grandparents co-signed a loan that went into default. Her father warned her never to co-sign for her children.
She learned that lesson the hard way. And even though her second son needs to establish credit, he won't get it with her help.
“I love him dearly, but, no, I will not co-sign again,” she said.
Co-signing loans can be risky
ASK THE MONEY PANEL
INVESTMENT PRIMER
MONEY BRIEFING
PEOPLE ON THE MOVE
