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Ask Dr. Don

Co-signing a daughter's car loan

Dear Dr. Don,
My husband has an 18-year-old daughter who wants him to co-sign a car loan for $14,000. He just bought a home last month and took out a mortgage for $150,000 and withdrew another $45,000 from his annuity. He makes good money, but he has extended himself to the point of not having any credit to fall back on if he co-signs this loan.

The daughter works about 30 hours a week earning minimum wage at a Wal-Mart. She insists that she can afford this loan. She has a poor driving record, and in addition to car insurance, she has to pay $1,800 a year in license insurance. I say she can't afford it, but he wants to give her the benefit of the doubt. What do you think?
Susan Sustainable

Dear Susan,
Co-signing the loan means that your husband will be responsible if his daughter can't make the payments. That means that he needs to figure out where he's going to come up with the money if she can't. Odds are that he'll be asked to step in to take on these payments.

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The Federal Trade Commission has an online brochure, Co-signing a Loan, that describes the pitfalls in greater depth. The best line in the brochure is, "When you're asked to co-sign, you're being asked to take a risk that a professional lender won't take."

It's not very realistic to expect that his daughter will be able to keep up with the costs of owning this car with a part-time, minimum-wage job and high insurance expenses. It would be a great idea for her to put together a monthly budget showing how she plans to meet this commitment along with her other financial obligations. Asking your husband to point out where the payment will fit in your household budget is the second part of this financial equation.

I'm guessing that neither my opinion nor yours will carry much weight in this matter.

Parents often make financial sacrifices for their children. Pointing out the risk inherent in co-signing won't change her father's desire to help her out.

If the goal is reliable transportation, she should be able to reach that goal for a lot less than $14,000, limiting the potential financial problems down the road.

-- Posted: Oct. 9, 2002

Read more Dr. Don columns
See Also
Should parents co-sign for a student's mortgage?
Dealing with a debt on a co-signed credit card
Financial advice glossary
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