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Should I Lend My Son Money to Pay-Off His Car Loan? - The Bills.com Blog
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Should I Lend My Son Money to Pay-Off His Car Loan?
Monday, Aug 24, 2009
Question: My son filed bankruptcy 2 1/2 yrs ago. He did get a car loan and has never paid late. Still has 3 yrs to pay. Is it a good idea for me to lend him money to pay off car loan of $8,000 and him repay me with little interest? How would this affect his credit history?
Answer: Whether loaning your son money to pay off his car note would be a wise move largely depends on the terms of his current loan, particularly interest rate being charged. If his current interest rate is particularly high (for reference, the national average is currently about 8%), it may make good financial sense to lend him the $8000 he needs to pay off the note. Presumably, you will offer your son a favorable interest rate, which could save him a significant sum of money over the life of the loan. Since he filed bankruptcy a couple of years ago, I would not be surprised if you told me that your son’s current interest rate is 15% per annum or even higher.Taking steps now to rid himself of the burden imposed by such high-cost financing may help your son create a more stable financial future by freeing up money that he can save and invest instead of spending it on high interest payments.
Paying off the car note should not negatively affect your son’s credit rating as it stands today; in fact,
it may have a slightly positive impact on his score by lowering his overall amount of outstanding debt.
However, if he pays the debt in full, the auto finance company will no longer be able to report your son's on-time payments each month, which have likely been helping him reestablish a positive payment history and rebuild his credit rating in the wake of his bankruptcy filing. Continuing to make payments to the finance company would likely improve your son’s credit score over the next few years, if coupled with other responsible uses of credit.
However, I do not think it wise for your son to allow a high-interest debt to continue to accrue finance charges each month simply to add a few points to his credit score. The benefit of continuing making payments is not significant enough compared to the effects of paying the debt now to justify the additional expense, which will be significant when considered over the life of the loan.
However, if he pays the debt in full, the auto finance company will no longer be able to report your son's on-time payments each month, which have likely been helping him reestablish a positive payment history and rebuild his credit rating in the wake of his bankruptcy filing. Continuing to make payments to the finance company would likely improve your son’s credit score over the next few years, if coupled with other responsible uses of credit.
However, I do not think it wise for your son to allow a high-interest debt to continue to accrue finance charges each month simply to add a few points to his credit score. The benefit of continuing making payments is not significant enough compared to the effects of paying the debt now to justify the additional expense, which will be significant when considered over the life of the loan.
Assuming that the interest rate on your son’s auto loan is well above average (which is very likely due to his bankruptcy filing), it would probably be a good idea to help him pay the debt off immediately (as long as you feel comfortable doing so). Once the debt is paid, your son can worry about rebuilding his credit by opening a low-limit credit card or gas card, which he should use judiciously and pay off every month.
If he is unable to obtain credit due to his bankruptcy filing, he may want to consider opening a small secured credit card. He could also ask a friend or relative to add him as an authorized user on an established credit account.
To learn more about credit and what steps your son can take to improve his credit rating, I invite you to visit the Bills.com Credit Information page .
I wish you and your son the best of luck, and hope the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com
Also, make sure to get a free financial health check-up with Bills IQ!
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1. Posted by Sarrons on Thursday 1st October 2009 06:20
What are the tax liabilities for my parents payin off my second mortgage directly? Can somone other than me pay off my second mortgage directly?
2. Posted by Bill on Thursday 1st October 2009 08:38
I really wish I knew more facts about your situation. In general, a person can gift another person $13,000 per year. However, through gift-splitting, a married couple can give another couple $52,000 per year tax-free. Also, if the gifting occurs over a series of years, the amount can be substantially more. See the IRS document Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return for more details.
3. Posted by sarrons on Thursday 1st October 2009 17:25
Thanks for that great response. I don't know if you will be able to help me, but maybe...Here is the whole situation. I purchased a new house approximately two years ago. I bought the house for 400k, and put down a significant down payment of 100k, tapping out all of my liquid assets. Subsequently the bubble hit, and two houses in my neighbohood foreclosed. This was especially horrible because I am in a new development that is approximately 25% completed and also i have the most expensive model, which my builder has now discontinued. We made substantial improvements. One of those improvements was a 50k inground pool. I did this through a second mortgage, however, now as a result of mortgage laws I cannot refinance the primary mortgage. The secondary mortgage will not subrogate to a new mortgage, essentially making them the first lein. As a result no mortgage company will touch me. I will pay-off the second mortgage because otherwise I cannot refinance. I have excellent credit and a substantial amount of assets, however, my equity was deleted with the bubble..I am looking for options, hence my original question. My builder has changed housing plans, and no longer offers my house and no longer offering basesments, which has dramtically reduced the comparable properties in my area. Pretty much I am screwed...
4. Posted by Bill on Thursday 1st October 2009 18:25
Depending on the area, your home may be undervalued as compared to other properties in other neighborhoods for the foreseeable future. However, if you take the long view your house will attain close to its expected value, especially if you stay on top of the basics such as painting and other maintenance items. You probably already know the pool is a loss -- in my personal experience I found as many people love them as hate them, so you would have never seen the money you spent on the pool in your pocket again, anyway, regardless of the drop in home prices.