'Son, Can You Spare a Signature? Kids Co-Sign for Credit Strapped Parents
Nov. 12, 2010— -- "Son, can you co-sign for my car?" That's the kind of question more adult children like Daniel Lee have heard from parents hit hard by the great recession.
"[My father was] working in the diamond industry when the housing boom happened; he started investing in housing and, unfortunately, when the housing market went down, he started losing money," leaving his credit damaged, Lee, a Miami-based computer programmer, says.
Lee's retired father, 65, began having difficulty keeping up with his mortgage payments as the housing market soured, and late mortgage and auto payments began to tarnish his credit. His father's newly checkered credit made it difficult to maintain a car and that's when his son stepped in.
After the credit crunch, record unemployment levels and financial Armageddon, many parents have chucked the norm and sought credit help from their children, financial planners say.
Evidence of such an increasingly popular arrangement has popped up in a few places. Although the number of parents co-signing for adult children has risen to 11 percent from 9 percent in the past two years, the number adult children helping parents with a car lease has increased more than 30 percent, according LeaseTrader.com, an online car-leasing website.
The adult children, defined as people ages 20 to 29, have been assisting parents who are 40 to 55.
The business of co-signing is a tricky proposition for adult children, especially those struggling to pay back their college loans or looking to save for a house.
"I got so much from him, I don't think that the short-term, 15-month lease, and the total amount for the lease, is going to destroy my life," Lee, 29, says.
The nation's economic woes appear to be adding to the burden. Fifty-six percent of bankruptcy debtors last year were ages 35 to 54, according to the Institute for Financial Literacy (http://www.financiallit.org/resources/2009Demographics.htm#Age). While the number of debtors between the ages 18 and 44 shrank, the number of bankrupt debtors ages 45 and up climbed slightly from 2008.
Foreclosures, unemployment and the overall health of consumer credit may be "forcing adults to make this decision and take this alternative approach," says John Sternal, vice president of marketing communications at Miami-based LeaseTrader.com.
But the financial alternative comes with pitfalls when a co-signer becomes liable for the full loan if a parent fails to pay. "One of the problems of co-signing is you usually don't know there's a problem until the loan is in default," says Rick Kahler, a financial planner at Kahler Financial Group in Rapid City, S.D.
"If a payment is missed, you're one of the last to find out."
A collection agency will go after a co-signer as aggressively as the original debtor. And, unfortunately, unlike a bank, a co-signer cannot repossess an auto loan if parents fall behind on a financial obligation.
Also, "late payment can blow someone's credit score by 100 points," says Sergei Lemberg, an attorney at consumer law firm Lemberg & Associates LLC in Stamford, Conn. "A single missed payment can cost you thousands of dollars."
A parent's failure to make timely payments could also result in higher interest for credit cards and other lines of a credit, and could affect mortgage approval rates.
What's more, co-signing on a loan turns a familial relationship into a business one. "You have to be ready to pay off that loan," Kahler says.
"If you think it's a wise thing to do, then, of course, go for it but you still must say, 'I'm going to be just fine if I have to step in and make this good because that's the bottom line.' The bottom line is you've got to be ready to pay off that note."
For Lee, there was no hesitation. "When I needed him, he was there for me," Lee says, adding that he pays the majority of the $280 car lease.
