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Adult children increasingly co-sign for parents' loans

Financial roles reverse due to rising debts, falling retirement funds

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It's almost an American tradition: Kids in their 20s without a credit history have long turned to their parents to co-sign for them, whether it's for a first credit card, a car or an apartment lease. Now the credit crisis is turning that tradition on its head.

Children co-sign for parents

Financial advisers, credit counselors and lenders across the country say they've seen a surge in middle-aged parents who have damaged their credit asking their adult children -- usually in their late 20s or early 30s -- to co-sign loans and leases for them.

"I'm seeing this a lot more now than I did two or three years ago," says Laurie Giles, an elder life planning attorney in Shelton, Conn., and author of the "What Now?" book series. "A lot of times, it's parents who had stable jobs for 20 or 30 years who got used to living on credit, then they're suddenly downsized and they don't have strong savings built up, or their savings went down with the market. And their house isn't worth what they thought."

No one tracks statistics on how common the practice is nationwide, and most lenders consider such information proprietary. But LeaseTrader.com, a nationwide car leasing marketplace, reports a 29 percent increase over the past two years in the number of parents asking their children to co-sign for them when shopping for a car lease.

"These are people who can afford to take over the lease payment, but have issues qualifying for credit," says Sergio Stiberman, CEO and founder of LeaseTrader.com. On average, the parents who get help from their children at LeaseTrader.com are taking over a payment of less than $399 per month, he says.

Most loans small scale
The kids-helping-parents practice is most common with smaller loans such as those for cars and furniture, and also for apartment leases -- not for mortgages, credit counselors say. Parents are also asking their grown children to co-sign on low-interest credit cards they don't qualify for by themselves. Some are so desperate that they secretly steal a child's identity to qualify for credit, says Elizabeth Schomburg, senior vice president of Family Credit Management, a Chicago nonprofit credit counseling agency. 

Just because you love them and trust them, you can't predict their financial future and how they'll react if they run into a tough spot and can't pay.

-- Bruce McClary    
Clearpoint Credit Counseling Solutions    

So what should you do if your parents come to you with a request for help? Tread carefully, experts say. Before you co-sign, make sure you consider the implications. (See 6 questions to ask before you say 'yes.') Then be prepared to pay if they can't.

"What children have to be very aware of is that this can backfire on them," says Bruce McClary, a certified credit counselor and spokesman for ClearPoint Credit Counseling Solutions, a nonprofit in Richmond, Va. "Just because you love them and trust them, you can't predict their financial future and how they'll react if they run into a tough spot and can't pay. Then it's on you."

Guard your own credit
Even if your parents make all their payments on time, the decision could still hurt you the next time you need credit for yourself -- if you're trying to get a home mortgage or a car loan, for example.

At CredAbility, a nonprofit credit counseling center based in Atlanta, one client who was about to buy her first home came in asking why her credit score was low, said Mechel Glass, CredAbility's director of education. The woman had a car loan, very little credit card debt and made all her payments on time, Glass said. But she also had a $10,000 loan she had co-signed for her parents. "Even though her parents made all the payments," Glass says, "that loan made her debt-to-credit ratio really high, and that pushed down her credit score. We advised her to get her parents to refinance the loan in their names only."

Emotional collateral damage
Leslie Lezia Brenner, a psychologist in Atlanta, said such situations can be damaging emotionally as well as financially. A grown child who supports a parent may start to question and resent the parent's decisions ("How can she afford a cruise if she can't even make her car payment?") in a way that can break down the child-parent relationship.

"It puts the child in a very difficult place," Brenner says. "They feel guilt if they don't help, anger if they do. It can cause them to lose a lot of respect for their parents."

Ashley Christian, 26, of Richmond, Va., said she felt obligated to help her mom get a car loan for a used Toyota a few years ago because her mother had been the co-signer on Ashley's first car. "I was especially hesitant because I work in the financial industry, and I know it's not a good idea to co-sign, but she raised me as a single parent and did whatever she could to help me," Ashley said. "She made me feel like it was my turn to help her out."

Mom's layoff affects daughter's credit
Her mother made the payments on time until she got laid off about a year ago, Ashley said. "I just happened to check my credit report and noticed a couple past-due payments she hadn't told me about," Ashley said. Then another blow: When she went to change her address on her driver's license, she learned her license was suspended because of an uninsured vehicle. "My mother hadn't paid the insurance," she says.

While Ashley eventually worked the license situation out, she still has the dings on her credit. "It was just a really tough, sticky situation that made both of us upset," Ashley says. "I just want to get my name off of it. I want to be able to buy a home in a couple of years, and now I have this to worry about."

An awkward money chat
Obviously, lending to your parents doesn't always turn out badly. Bonnie Michelle Crowder of Houston said she agreed to co-sign a car loan for her mother more than 10 years ago when she was in graduate school.  When her mother missed some payments during a job transition, Bonnie had to have a talk with her. "I told her, 'I understand you're trying to build up a business, but it's important that the bill gets paid. You have skills. You have a college degree. If you need to, get a temp job to fill the gap.'"

It was an awkward conversation, Bonnie says, but her mom never missed another payment and eventually paid off the car.

Her mother, who is now a successful financial planner, is still driving the car, Bonnie said: "She called me just the other day and said, 'You know that car you helped me buy? We just hit 375,000 miles.'"

6 QUESTIONS TO ASK BEFORE YOU LOAN MONEY TO PARENTS
  1. Can you afford to make the payments? When you co-sign, you're entering into a contract that holds you responsible for the entire debt. If your parent misses one or more payment, the bank will come after you for the money. "Go in thinking, 'I may be buying my parents a car,' and make sure you're OK with that," says Mechel Glass of CreditAbility, a  credit counseling firm.
  2. Can your parent(s) afford the payments? If the lender is requiring a co-signer, it's probably for a good reason, says Gary Foreman, a former financial planner who edits thedollarstretcher.com (and writes the "New Frugal You" column for CreditCards.com). "By co-signing, you may be putting your parents in a situation where they're going to be constantly struggling to make the payments." Ask to see their monthly income and expenses to make sure they have enough cash to take on the extra debt.
  3. Do you want to set any conditions? If you're worried about your parents' money management skills or their current debt load, require them to see a credit counselor before agreeing to co-sign. Or tell your parents you expect them to refinance or sell within a certain amount of time.
  4. Why do they need a co-signer? Consider why your parent's credit score is so low and take that into account. If your parent has a history of mismanaging money, that's a red flag.
  5. How will it affect your debt-to-income ratio? Experts traditionally recommend no more than 36 percent of your gross income should go toward debt. Any higher and your parent's debt could be counted against you when you're applying for your own car loan or a mortgage.
  6. Is there another solution? Experts say almost anything is better than co-signing a loan. If you can afford it, purchase the item for your parents and have them pay you back. "It's better to buy them a $2,000 car than to co-sign a $10,000 car note," Foreman says. Consider whether your parent could do without whatever they want you to co-sign for. Or see if the lender will allow you to "vouch" for them rather than co-sign. (This is especially common with leases.)

See related: 4 questions to ask before you co-sign on a credit card, The risks you incur when you co-sign, Escaping co-signing: How to get out of co-signed loan, credit card

Published: July 1, 2010


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