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My mother and I are considering getting a loan through the Dividend Finance programme to have a solar panel installed. My mother filled out the primary applicant section of the application and is awaiting her signature. But I was thinking of also signing on as a co-applicant to help diversify my credit report, as I currently have a credit card and credit builder loan, and I have a part time job that may become full-time in the near future.

the loan amount would most likely be around $25,000.00. If the minimum payment was $180/month for 144 months or twelve years, would each of us have to pay $180, or could we divide it between the two us, so I pay 90, and she pays 90?

HeavenlyHarmony
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    See answers to https://money.stackexchange.com/q/76725/19497 to get an appreciation of the perils of co-signing. – RedGrittyBrick Aug 20 '21 at 14:18
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    Did you actually make sure the installation itself makes financial sense? How much is her current electricity bill? Is everything electric? Where are you located? Is $180 something she can afford even if she doesn't save a cent? – jcaron Aug 20 '21 at 16:29
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    "...to help diversify my credit report". What does diversifying your credit report do? AFAIK you just want to maintain a good credit score, not necessarily diversify it. You have a credit card and credit builder loan, with a part time job. I'd say that is enough for now - certainly wouldn't put your name down on an additional $25k debt. – BruceWayne Aug 20 '21 at 18:33
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    The co-signer is usually more wealthy than the person taking out the loan, and they do this because the other person doesn't have good enough credit to qualify by themselves. Imagine a parent helping their child get their first car loan. The other relationship rarely makes sense. – Barmar Aug 20 '21 at 19:27
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    I know this is not the question, but you should drop this whole idea. Never in the entire lifetime of the panel will you make back $25000 in energy savings, much less the "plus interest". The whole thing is a scam to make money for the lender and installer, not the homeowner. – R.. GitHub STOP HELPING ICE Aug 20 '21 at 21:52
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    If you really want rooftop solar, start off researching how much output you can expect from it (in kwh/month; kw at peak sun intensity is not meaningful) and convert that to a dollar amount using the price per kwh on your electric bill. Even after you fully pay back (or pay off the loan for) the expenses of setting up the system, that is all the savings you will ever get off it, and that's only so long as it lasts. I would not even look at a system you couldn't pay cash for; it's not a good use of borrowed money. – R.. GitHub STOP HELPING ICE Aug 20 '21 at 21:59
  • A reasonable amount to spend on home solar is a few thousand dollars, not tens of thousands. That's probably only going to be doable if you or a friend has sufficient technical expertise to cut out lots of the costs. But if you don't, solar just is not economically viable for you. – R.. GitHub STOP HELPING ICE Aug 20 '21 at 22:01
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    @R..GitHubSTOPHELPINGICE - Not sure where OP is, but we're paying $100 - $300 a month in electricity now which is about normal. In ten years, this is about $24,000. How does replacing that with a $25,000 solar system (that's guaranteed for 20 years) not make sense? Most single family systems around me around $20,000 - $30,000. – Hannover Fist Aug 21 '21 at 00:38
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    Is the system going to produce enough electricity, reliably, to cover that $100-300? Or just $50 or so? What about cost of maintenance? Interest? Lifetime of the panels? It's a large debt to take on for the prospect of... breaking even? – R.. GitHub STOP HELPING ICE Aug 21 '21 at 01:43
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    @HannoverFist totally depends on the deal you get from the power company and sizing. If it's a 25KW array that is rolling your meter backwards (PoCo pays you same amount you pay for power), awesome. If it's a 5KW array where the PoCo pays 3 cents a KwH, terrible. – Harper - Reinstate Monica Aug 22 '21 at 01:38
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    I've heard of solar panel scams in the US where they specifically target elderly people to sign up for expensive solar panels. Please check carefully if this makes financial sense! – pipe Aug 23 '21 at 13:56
  • @HannoverFist A solar system does not guarantee that you will get enough power to fully replace your current bill. It depends a lot on location, system details, presence of batteries, usage patterns, and whether you are paid for energy fed back into the grid. It's not like the system is going to magically zero out your energy bill. It may (and it may even make you money), but there's also a good chance you'll still have electricity to pay. That changes the equation. You need to do your homework on what the array will effectively provide over a full year and whether you'll reach break-even. – jcaron Aug 23 '21 at 14:07

4 Answers4

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the loan amount would most likely be around $25,000.00. If the minimum payment was $180/month for 144 months or twelve years, would each of us have to pay $180,

That's not how co-signing works. It means that each co-signer is fully responsible for the whole balance.

Let that sink in: if you co-sign the loan, YOU are FULLY responsible if your mother stops paying (for whatever reason).

or could we divide it between the two us, so I pay 90, and she pays 90?

You could do that, sure. But the credit bureaus won't know it's you paying.

I currently have a credit card and credit builder loan, and I have a part time job

Don't do it. I repeat: don't do it.

RonJohn
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    Can I just repeat that? Don't do it. Never, ever, ever co-sign for anyone. If you have the money, and you want to give them the money, give them the money. If you don't have the money, or you don't want to give them the money, don't give them the money. But NEVER co-sign. – gnasher729 Aug 20 '21 at 09:22
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    Not only that but this is NOT a good thing to purchase on credit. The interest will greatly increase your break-even point and will possibly push it past the effective lifetime of the equipment. Do your homework on a PV system, save your money, and pay cash for it! – jwh20 Aug 20 '21 at 10:41
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    To make it worse, by the time the debt collectors start coming for you as a co-signer, the account is already in default, with extra interest and late payment fees added. As co-signer, you will be responsible for paying it all. – Simon B Aug 20 '21 at 12:38
  • @gnasher729 due to a bit of a misunderstanding, my then-father-in-law co-signed a load for me to buy a Mac SE/30. We weren't well off, but I made darned sure that I made those payments, or it would have destroyed our relationship. (It ended later due to divorce, but on a positive note.) – RonJohn Aug 20 '21 at 13:38
  • Agree the risk-reward ratio is off here, as it is in a lot of co-signing cases. OP would take a big risk with both their money and personal relationships, for the sake increasing their credit score by a few points. Unless a co-signer gets benefit commensurate with their risk, they should recognize that it's effectively philanthropy - a financially irrational investment in someone else. – Nuclear Hoagie Aug 20 '21 at 15:02
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    @NuclearHoagie just remember that there's more to life than financially rational investments. If you can eat the cost and trust the "primary" to not be a deadbeat, then it's reasonable to co-sign (since there are other reasons why the primary might fall behind). – RonJohn Aug 20 '21 at 15:10
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    Only co-sign a loan you are 100% comfortable with paying the entire loan for. – Michael W. Aug 20 '21 at 15:26
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    @jwh20 OP says "$180/month for 144 months" which works out to a very low APR - either zero or near it. Lower than inflation; they'd be ahead the curve, not behind. – ceejayoz Aug 20 '21 at 15:26
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    @gnasher729 I think you mean if don't have the money or don't want to give it to them, don't cosign. If you have the money and are happy to give it to them, but would rather see them make their own way - why not co-sign? – TCooper Aug 20 '21 at 21:15
  • @TCooper that's exactly right. And to that, point... OP does not have the money. – RonJohn Aug 20 '21 at 21:18
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    @ceejayoz There is a trick when lending money using in-house financing that you inflate the price to pay for the loan interest. Sometimes this is reflected in "cash discounts" for people who pay directly (or whatever), then a low interest rate. This also means that paying early doesn't get you much benefit. – Yakk Aug 21 '21 at 14:49
  • @gnasher729 I think that's a bit extreme. Most millennials will never (literally never) be able to own their own home or get into college without a cosign from a parent. Cosigning is fine as long as you clearly understand the risks you're getting yourself into. The problem is most people don't, on both sides of it, and that is what leads to problems. – corsiKa Aug 23 '21 at 05:42
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I am going to ignore, or at least minimize, some things:

  • The risk if one of the people on the loan agreement fails to make the payment
  • The impact on the monthly payment. It is likely that your thin credit file and low monthly income will not improve the situation regarding the monthly payment.

There is another potential impact. It is the 12 year length of the loan. For the next 12 years, or until the loan is paid off early if additional money is sent to the lender, you will have to report this loan whenever you are applying for credit or a loan. Potential lenders will see the obligation to pay $180 per month and factor that into what you can afford.

It doesn't matter if all the money comes from the other person. It doesn't matter if there is never a late payment.

But I was thinking of also signing on as a co-applicant to help diversify my credit report, as I currently have a credit card and credit builder loan, and I have a part time job that may become full-time in the near future.

The end result will be that you diversified the report, but the cost is the locked in responsibility on your credit report.

If you apply for a car loan, or a mortgage, or even to rent a place; the lender or landlord will figure in the $180 monthly payment into what you can afford based on your income. That might force you to go with an older car, or a smaller car or a place in a less perfect location.

mhoran_psprep
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Depending on the terms of the loan and how the interest rate is calculated (ie is it a flat rate, or could adding you to the loan decrease it), it is possible that adding you to the loan could result in a slightly lower monthly payment.

If your rating is lower than your mother's, then the payment will not be decreased, and may actually increase (again, depending on if the interest rate changes).

That being said, I'll repeat the other answer's admonition to not do this. Co-signing is something that has the potential to ruin relationships, and can seriously come back to haunt you.

If your mother becomes disabled, or otherwise unable to make the payments (if she is the only one on the loan) then the creditor has little recourse, other than repossession. If the same situation happens, and you are also on the loan, then you are liable for the remaining balance.

If your mother simply decides later to just not pay, and you are on the loan, then you still get the results of the previous paragraph, but you also get bonus family drama and disappointment, and (if you can't pay), can destroy the credit rating you are trying to build.

Michael Richardson
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  • I expect that if he has a good enough relationship with his mother that he wants to do this, it's unthinkable that she would voluntarily "decide just not to pay" and saddle him with the debt. – Barmar Aug 20 '21 at 19:29
  • So he would only become responsible if something unexpeted occurs (e.g. she passes away). And if he gets an inheritance, it could cover the expenses. – Barmar Aug 20 '21 at 19:32
  • @Barmar It is always "unthinkable" that such a thing would happen. Many people who co-sign are absolutely convinced that it is just a technicality and for most of those it doesn't even cross their mind that they are now liable for the entire debt. Things happen, and the mother's situation or priorities may change and result in the payments not being made. – Michael Richardson Aug 22 '21 at 04:59
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Not addressing at all whether you should co-sign, I think it's helpful to explain what the minimum payment is, as you probably don't understand what that is.

For fixed debt, meaning debt with a certain dollar amount that doesn't allow you to borrow more (like a credit card would), minimum payments are calculated as the amount that, including interest, will pay off the full loan over the life of the loan.

So, if you have $10,000 borrowed, and it's a 1 year loan, with 12% interest (annual, compounded monthly), then you can do the "back of the envelope" math to figure out around what the monthly payment is:

Interest = 100 for the first month (1% = 1/12 of 12%)
Principal= 833 (1/12 * 10000) 
Payment = 933

It ends up being less, because you pay down the loan and reduce the interest over time - see this amortization calculator which does the math for you. This shows a payment of $888 for that loan.

Month Total Interest Principal
Month 1 $888 $100 $788
Month 2 $888 $92 $796
Month 3 $888 $84 $804

Etc, until it's paid off. That loan minimum payment is for the loan and has nothing to do with the party(s) who owe it; it's solely determined by the amount owe, the interest rate, and the length of the loan, plus some technical details.

The only way cosigning could affect that payment is if it changed the interest rate or the term (length). It could certainly affect that, though, if it increased or decreased the risk associated with the loan.

Joe
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