A reader's goddaughter needs a new car. But does he need the headache?

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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” sounds 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 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 you can see from 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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About the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

I’m a certified public accountant who has authored two books on getting out of debt, Credit Hell and Power Up, and I am one of the personal finance experts for Debt.com. I have focused my professional endeavors in the consumer finance, technology, media and real estate industries creating not only Debt.com, but also Financial Apps and Start Fresh Today, among others. My personal finance advice has been included in countless articles, and has appeared in the New York Times, the Washington Post, Forbes and Entrepreneur as well as virtually every national and local newspaper in the country. Everyone should have a reason for living that’s bigger than themselves, and besides my family, mine is this: Teaching Americans how to live happily within their means. To me, money is not the root of all evil. Poor money management is. Money cannot buy happiness, but going into debt always buys misery. That’s why I launched Debt.com. I’m glad you’re here.

Published by Debt.com, LLC