On the money: Co-signing a loan

Nursing, May 1998

Your 20-year-old daughter wants to buy a new car. She's got enough money for a down payment and she just started her first full-time job. Unfortunately, the manager of the car dealership won't make the loan without a cosigner because your daughter lacks credit and employment history.

Co-signing this loan will help your daughter establish credit in her own name. But before you put pen to paper, you should understand these two important points about your role as a cosigner:

1. You're equally responsible for the loan. If the primary borrower-in this case, your daughter-defaults on the loan, you must meet the terms of the loan. In some instances, instead of repossessing the item for which the loan was taken, a lender might demand payment from you instead.

2. A co-signed loan becomes part of your credit history. Even if the primary borrower never makes a late payment, there's a chance you can still be denied a loan. Why? Financial institutions consider a co-signed loan your responsibility and include the amount in your debt-to-income ratio.

Source: Reports on Credit, Issue 3. Experian.