25, employed, and the bank still treats you like a kid
Millennials are turning to their parents to co-sign loans they can't get on their own. That carries risk for Mom and Dad.
About two-thirds of millennials have asked someone to co-sign a loan or lease — unsurprisingly, they're looking to Mom and Dad when they need the help, according to a recent survey by Experian Consumer Services.
Co-signers are necessary if a consumer wants a loan (or to rent an apartment) but cannot get approval on their own. The co-signer guarantees that payment obligations will be met, and if they aren't, the co-signer will be held accountable. In short: If the primary borrower screws up, the co-signer's credit suffers.
The survey results were drawn from interviews conducted with 1,000 Americans between ages 18 and 30 from Jan. 24 and Jan. 31. The margin of error is plus or minus 3.1 percent.
Of the two-thirds of respondents who have needed a co-signer, the most common reason (35 percent) was to take out education loans, and residential leases were a close second at 32 percent. Millennials also used co-signers to get car loans (19 percent), credit cards (17 percent), car leases (11 percent) and mortgages (6 percent).
Consumers should be extremely careful when considering co-signing a loan; the other person's behavior can adversely affect your credit standing, and it can take a while to recover from credit damage.
The survey shows a bit of good news: Of the millennials who have taken out co-signed loans, only 8 percent reported having delinquent or defaulted co-signed accounts.
It may be a small percentage, but that's probably no comfort to the co-signers on those loans.
Not all those co-signers saw their credit scores drop, but they were affected in one way or another: 32 percent of the co-signers made payments when the borrower could not and 7 percent took on the debt when the borrower defaulted. Twelve percent reported credit score damage.
Other risks for co-signers
Even if the borrower handles the account responsibly, the co-signer needs to consider how else the extra loan could impact his or her credit: The extra account may elevate your credit utilization rate and increase your debt obligations. Co-signing a loan will also result in a hard inquiry on your credit report, too, so that could hurt your credit score or chances of getting a different loan in the short term. (If you want to see how a co-signed account is affecting your credit, you can get two of your credit scores for free on Credit.com, plus a personalized plan for building or maintaining good credit.)
It's understandable parents want to help their kids get started financially, but there are ways to help a young adult build credit without risking your own credit standing. A student credit card or secured card may be easily accessible for those starting out, and parents can also add their kids as authorized users on their credit cards. There's always the risk that the authorized user may run up a large credit card bill, but that won't be as damaging as a delinquency on a co-signed account.
Either way, whenever there's shared responsibility for credit, communication must be a top priority -- 17 percent of millennial borrowers who fell behind reported that their co-signers didn't learn about their repayment issues right away.
More from Credit.com
- Your first credit card: What you need to know
- How to get a credit card with no credit
- What is a good credit score?
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