Should You Co-sign Loan for Loved One?

What should you do when someone you love is on a wave-tossed financial ship?

College students usually don't have much of a financial track record, so to obtain a private loan for school they frequently need a co-signer. And with lenders taking a harder look at borrowers during this credit crunch, the need for co-signers will only grow. But as much as you want to help a student, think twice before putting yourself in this situation. Better yet, think 20 times. Being a co-signer is like taking out the loan yourself, with less control. If the primary borrower—the new graduate—is late with payments, your credit score gets dinged too. Worse, if the borrower doesn't repay, you are on the hook to repay the loan. "They could try to garnishee your wages," said Mark Kantrowitz, publisher of FinAid, an online provider of financial aid information. Lenders require a co-signer when a student's ability to repay a loan is in doubt. With a co-signer, the student might also receive a break on the interest rate on the private loan. Over time and under certain conditions, a lender may allow a co-signer to be released from the loan. But this will be impossible if the borrower is frequently late with payments. Parents wanting to help a child, of course, might know the risks and be OK with them. But some co-signers—such as fellow students—might have no idea what they are getting into. More...

Frugal Ben Says: Be creative! Find another way to help them! Most of the time, there are other things you can do to assist them, such as personal loans, gifts, whatever. If their ship is sinking, you won't be able to rescue them if your ship is sinking too.