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Saturday
Nov132010

'Son, Can You Spare a Signature?' Kids Co-Sign for Hard-Up Parents

Photo Courtesy - Getty Images(MIAMI) -- "Son, can you co-sign for my car?" That's the kind of question more adult children have heard from parents hit hard by the great recession.

Evidence of such an increasingly popular arrangement has popped up in a few places. Although the number of parents co-signing for adult children has risen to 11 percent from 9 percent in the past two years, the number of adult children helping parents with a car lease has increased more than 30 percent, according to LeaseTrader.com, an online car-leasing website.

The adult children, defined as people ages 20 to 29, have been assisting parents who are 40 to 55.

Foreclosures, unemployment and the overall health of consumer credit may be "forcing adults to make this decision and take this alternative approach," says John Sternal, vice president of marketing communications at Miami-based LeaseTrader.com.

But the financial alternative comes with pitfalls when a co-signer becomes liable for the full loan if a parent fails to pay.

"One of the problems of co-signing is you usually don't know there's a problem until the loan is in default," says Rick Kahler, a financial planner at Kahler Financial Group in Rapid City, S.D.

"If a payment is missed, you're one of the last to find out."

A collection agency will go after a co-signer as aggressively as the original debtor. And, unfortunately, unlike a bank, a co-signer cannot repossess an auto loan if parents fall behind on a financial obligation. A parent's failure to make timely payments could also result in higher interest for credit cards and other lines of a credit, and could affect mortgage approval rates.

What's more, co-signing on a loan turns a familial relationship into a business one.

"You have to be ready to pay off that loan," Kahler says.

"If you think it's a wise thing to do, then, of course, go for it but you still must say, 'I'm going to be just fine if I have to step in and make this good because that's the bottom line.' The bottom line is you've got to be ready to pay off that note."

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ABC News Radio