The Risks of Co-Signing

Q My son is planning on buying his first car, and the finance company has told him that, due to his lack of credit, he will need to have a co-signer. While my husband and I would like to help, we are concerned as to whether co-signing would be wise. What do you think?

A In reaching an answer, you'll want to consider the following issues. I would encourage you and your husband to discuss these together before sharing your decision with your son.

• When co-signing, it is as though you are taking on the debt yourself. Are you prepared to accept this obligation?

• Is the dollar amount of your financial commitment fixed?

• Has your son shown himself to be sufficiently mature to handle the responsibility of a car loan?

The Book of Proverbs provides great insight into the issue of surety and co-signing. Let's look at two references, which provide food for thought:

Proverbs 6:1-5: “My son, if you have become surety to your neighbor, given your hand in pledge to another, you have been snared by the utterance of your lips, caught by the words of your mouth; So do this, my son, to free yourself, since you have fallen into your neighbor's power: Go, hurry, stir up your neighbor! Give no sleep to your eyes, nor slumber to your eyelids; Free yourself as a gazelle from the snare, or as a bird from the hand of the fowler.”

Proverbs 22:26-27; “Be not one of those who give their hand in pledge, of those who become surety for debts; For if you have not the means to pay, your bed will be taken from under you.”

These verses get right to the point of what your primary consideration should be. When someone co-signs on a loan, they are accepting responsibility on that debt just as though they had taken out the loan themselves. The debt will be listed on your credit report, and in the event your son was to be late with his payments, that information would be listed on your report as well. Finally, if your son fails to meet his obligation, the finance company will come to you for payment, and you will be responsible for meeting that obligation.

While the dollar amount in your situation is fixed, there are cases where you may be taking on a greater obligation than you think. For example, if a college student were to ask his parents to co-sign on a credit card, the bank could increase the credit limit without notice to the co-signer. That could be a recipe for disaster.

Finally, you know your son. Has he managed his finances (checkbook, etc.) well? If so, you may have a greater level of confidence that he will properly handle the obligation. While this allows him to build a positive credit record, you still need to be prepared to take over the debt obligation if he, for whatever reason, fails to make the payments. God love you!

Phil Lenahan is executive director of Catholic Answers.

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