What to Do When a Child Asks You to Cosign a Lease

A reader and his spouse are considering cosigning a lease for their adult child. We look at the potential dangers to your wallet and your credit score, and offer suggestions on how to protect yourself.

Q: We’re considering cosigning a rental lease for our son. What are the pitfalls?A: These days, a recent college graduate with no credit history is likely to find it hard, if not impossible, to get a loan or a credit card, or to lease an apartment without a cosigner. In fact, a recent law bars anyone under 21 from getting a credit card without an adult consigner.

So, your adult child has asked you to cosign … should you? The risks are very high -- according to the Federal Trade Commission, an estimated three out of every four consigners end up on the hook for the loan when the primary borrower defaults. There are ways to cut the risk, however, and some involve taking off your parent hat and putting on your banker’s cap.

Start by asking the same questions a banker would: Is your child employed? What is his or her after-tax salary? Can the child afford the loan or lease on that level of income? If you’re cosigning for a credit card, ask how the card will be used and set a low limit, say $600, on purchases. Perhaps most important, you should know that the lender will come after you if your child misses payments -- and your credit score will be dented as a result -- so you should monitor your child’s repayments carefully. If you have doubts about your child’s ability to make payments in a timely manner, reconsider cosigning.

If you’re cosigning on a lease, you become your child’s landlord and you have the right to set rules on how the apartment is used. If your child has a roommate, you can try to spread the risk by asking the roommate’s parents to cosign as well. If you’re cosigning on a car loan, put your name on the title along with your child’s name. That way, if the payments aren’t made, you can cut your losses by selling the car.

HAVE A QUESTION FOR "ASK THE EXPERT"? Email Physician's Money Digest at tcullen@hcplive.com.