My granddaughter wants me to co-sign her car loan. Should I?

The question

An illustrative letter.

The answer

My dear, of course you want to say yes. She is nineteen, she is working, and she needs to get there. Wanting to help is what grandmothers do, and it speaks well of both of you that she has a job worth getting to. But I spent many years on the lender's side of the desk, and I want you to see co-signing the way a lender sees it, because the dealer's friendly words leave a great deal out.

What does co-signing really mean?

When you co-sign, you are not vouching for her character. You are promising to pay the loan yourself if she does not. The Consumer Financial Protection Bureau puts it plainly: a co-signer is legally obligated to repay, and the lender can collect from the co-signer without first trying to collect from the borrower. That can include late fees and collection costs on top of the balance.

The loan also appears on your credit report as your debt. If she pays late, your credit suffers alongside hers. And even if she pays perfectly, the loan counts against you if you ever need to borrow yourself.

Lenders must give co-signers a written notice explaining these responsibilities. If the dealer puts one in front of you, please read every word.

Why does the dealer want a co-signer?

A lender looks at a nineteen-year-old with a new job and sees very little history to judge her by. Your signature lets the lender lean on your credit and your income instead of hers. In other words, the dealer is really asking to borrow your good name. Dealers also often arrange the loan themselves, and they can add to the interest rate the lender offers. That is one more reason it helps to know what rate she could get elsewhere before anyone signs.

Why does a fixed income change the picture?

Because there is very little room for a surprise. A young driver's car payment, often several hundred dollars a month, could arrive in your mailbox if she loses her job, has an accident or simply falls behind. If the car is repossessed and sold for less than is owed, the shortfall can come to you too.

Ask yourself one honest question: could you make every remaining payment from your own income, without harming your own needs, if you had to? If the answer is no, then co-signing puts your security at risk, however much you love her.

Is it only about money?

No, and that is the part people rarely mention. When a co-signed loan goes wrong, the money is hard, but the strain on the family can be harder. A grandmother chasing her granddaughter about late payments is not the relationship either of you wants. Keeping money and love apart can protect both.

How else can I help her?

There are kinder ways to help that keep you safe:

• A gift toward the down payment. A larger down payment means a smaller loan, which may be one she can get on her own. Whatever you give, give it as a gift, an amount you can afford to part with.
• A cheaper, reliable car. A modest used car with a smaller loan, or one bought outright, may serve her just as well for getting to work, and it costs less to insure.
• Help shopping for the loan before the dealer. Many people get preapproved by a bank or credit union first, so they know what rate they qualify for. Some credit unions have programs for first-time car buyers with little credit history.
• Help building her credit. A secured credit card or a small credit-builder loan, paid on time every month, can give her a credit history of her own within a year or so.
• A bridge in the meantime. Help with bus fare or rides for a few months while she saves can buy time for a better plan.

The checklist further down gathers these.

What if I decide to co-sign anyway?

It is your money and your choice, and some grandparents decide the risk is worth it. If you do, protect yourself. Keep the loan as small as possible, with a sensible car and a real down payment. Ask the lender to agree in writing to tell you if a payment is missed, and ask for online access so you can see the account yourself. Keep copies of every paper you sign. And talk with your granddaughter, before you sign, about what happens if she cannot pay: who she will tell, and how quickly.

How do I say no without hurting her?

Tell her the truth, warmly: "I love you, and I want to help you get that car. I can't sign the loan, because if something went wrong, I couldn't afford the payments on my income. But here is what I can do." Then offer the help you can give. Most young people, once they understand, respect a grandmother who protects herself, and they remember the help that came with the no.

You have spent a lifetime taking care of others. Taking care of yourself now is part of taking care of her, too.

One thing to do this week

Ask the dealer for the full loan details in writing, take them home, and work out whether you could make every payment yourself.