Co-sign a loan?

Question: My daughter and son-in-law have an empty "underwater" condo. We all shudder at the thought of renting it out! It's hurting them to be paying a mortgage and other expenses while not living there, so they hope to sell it in 2009. They will owe around $25,000 more at closing than they will receive. I am considering either loaning them the money at a rate about what I can earn on a CD or other savings, OR co-signing a loan from their bank or credit union. I trust them to make payments either way. What are the advantages and disadvantages of either of these plans - for them AND for me? Carol, St. Cloud, MN

Answer: I am not a fan of anyone co-signing a loan from a bank or credit union no matter how much you trust the person. You know them, and you know that they are trustworthy people. But sometimes even very good people can't pay a loan because of a lost job or big medical bills. And then you are on the hook to make the loan payments if you co-signed the loan.

I have been getting more questions lately about co-signing. It's a reflection of tough economic times. Although the circumstances are very different from yours, I want to highlight another email I recently received from a listener. It's from Gregory in Irvine, CA, and it offers a grim reminder of the risks of co-signing:

I co-signed a car loan for a friend and right now there is about 4,000 owed to it. This was a mistake that I regret a great deal because it turns out my friend is not responsible with money and I have just learned he lost his job a few weeks back. I no longer talk to this friend of mine and I do not want any communication. Last week Wachovia, the loaning business, called me and told me that this last months car payment is 15 days over due and they will report the late payment in another 15 days. Please help. I do not want to bail out my former friend for a car he never should have bought in the first place, yet I do not want my credit to be destroyed. Can I refinance the car in his name alone? If the car gets repossessed will it really upset my credit that much? What should I do? What would you do?

Greg is legally obliged to pay up. The only solution I can see is Greg needs to swallow his distaste and approach his former friend and see if they can negotiate some kind of solution.

Since family relations are strong in your case, and everyone wants to avoid the renting option, I would lend the money with an interest rate to your daughter and son-in-law. Then if they fall on hard times the three of you can renegotiate the loan without the involvement of credit reporting bureaus, credit scores, or an impersonal financial institution.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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