Question: My goddaughter wants me to co-sign a car loan. She’s only 20 but is very frugal: She’s buying a used Honda Civic, not a sports car. But the loan is for $8,000, and she’s still in college.
She works in a restaurant when she’s not in school and promises me she’ll pay me back. But I always heard that co-signing a car loan is dangerous. What should I do?
— Mark in Pennsylvania
Howard Dvorkin CPA answers…
Co-signing any loan is dangerous.
The word “co-sign” sound harmless enough. It’s not. Essentially, you’re promising the lender, “If the person who took out the loan can’t pay you back for any reason, I will.”
It’s called “guaranteeing the debt.” If your goddaughter fails to make payments — no matter how good her intentions — you owe whatever’s left on the loan.
Even worse, you might owe late fees and collection costs. You can even be sued for the the unpaid balance. Even worse than that, you might get no warning of what’s about to happen, because the lender isn’t obligated to notify you that your goddaughter is falling behind on her payments.
Watch this video, Mark, and then we’ll talk about solving your dilemma…
As I said at the end of the video, you’re better off lending your goddaughter as much as you can afford. That way, your credit score can’t be damaged and you won’t be worried about paying fees should she default.
I know what you’re thinking, Mark: “My goddaughter is very responsible and would never stick me with that debt.” Sadly, I’ve seen bad things happen to good people. Your goddaughter’s restaurant might close, she might twist her ankle and not be able to work for a month, or her college tuition, rent, or book costs could suddenly skyrocket.
As you can see, this has nothing to do with the character of the person you’re co-signing for. It’s a financial decision that could prove costly.
If you can’t lend your goddaughter enough to pay for the cost of the car, you’re better off buying a lesser vehicle and asking her to pay you back. Unless you have $8,000 (and then some) in the bank, I can’t urge you enough not to co-sign the loan.
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Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.