Don't default on co-signed loan to teach son a debt lesson

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
My husband and I co-signed on a car loan with our son. He doesn't seem to understand this is his debt. He hasn't paid a thing -- we have made all the payments so far. We've told him that if we stop making the payments, he will lose his vehicle and we will get bad credit. He has $8,000 remaining on a $17,000 loan. We have good credit. How will this affect our score if we just stop paying?  -- Margaret


Dear Margaret,
It will affect your score -- and badly. How much? Thirty-five percent of your FICO credit score is based on payment history. It's hard to say how many points you will lose, but the better your score, the more one late payment will cause it to dive. His will dive, too.

If you deliberately stop paying altogether, it gets worse. Credit reports show how far overdue you are on payments, so by the time the account is 90 days overdue, your credit histories will be severely compromised.

Letting the car loan go into default to show your son what happens would be a lot like driving the car into a wall to show him what happens if you don't use the brakes. It would be a memorable lesson, to be sure, but I can't recommend it. There's just too much potential for damage to all three of you.

You've already talked to your son and told him that this is really his debt. He thinks you're bluffing. The best solution is to get out of this deal altogether. Your son has to sell the car -- now. The free ride is over. He's had his chance.

I'm not sure what you can do if he refuses to sell the car. That's one problem with co-signing a loan. Assuming your name is not on the title, you don't really own the asset. If you had loaned the money to your son and he didn't make payments, you'd have more recourse. As a co-signer, you have all the responsibility and very few options. Let's hope that when you tell your son you're not making the payments anymore and he has to sell the car, he believes you.

One option is to have your son sign over the car to you, with the promise to make payments to you. You would now have control of the car. You could pay off the loan with other funds, refinance the car or talk to the lender about having him taken off the loan. Now it's your car. The first time he doesn't make a payment to you and he has no extenuating circumstances, you sell it.

There's nothing wrong with helping kids get started financially. If a son or daughter can't get to work without a car, buying them a car or helping them buy one can be a great idea. When they take advantage of you, however, the arrangement hurts him, you and your husband, and even your relationship with your son. You would be far better off making limited gifts to your son -- for example, buying him a cheaper car outright -- than getting entangled in a co-signing deal.

In many co-signing arrangements, the co-signer ends up making the payments (at least you know you're not alone). Never co-sign unless you are fully prepared to make the payments.

See related: Mom co-signed, now stuck with student loan payments, Walk away from co-signed loan? No such thing

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Updated: 11-21-2017