‘I’d love to help them out as much as I can, but I also have to build my own life’: Can I cosign a $40k loan for my parents risking a possible 401k loan denial?

Dear Money Minder,

My name’s Financially Savvy and I need your advice. So, my mom took out a $50k hardship loan from her 401k during the whole COVID mess about 3 1/2 years ago. Fast forward to now, she still owes $15k on that loan and has racked up $18k in credit card debt. Interest is literally chomping away at her finances.

Now, my parents want me to co-sign a $40k loan to help them pay off these debts. This would cover the $15k left on the 401k loan and wipe out the credit card debt. But here’s the thing – could the 401k deny the next loan because she hasn’t paid off the first one on time?

I’ve busted my butt to get my finances in order. All my debts are gone, and my credit score is killing it at 810. But I don’t want to end up stuck with a $40k loan if the 401k says no. Tough spot, right? I’m 30, independent, but my parents have always been there for me. I want to help them, but I also need to watch out for my own financial future.

Thanks for any insights you can offer.

Best,
Financially Savvy

Response from THE MONEY MINDER:

Hello There,

I can understand your concern regarding the situation your parents are facing, and I commend you for being responsible with your own finances. It’s a tough spot to be in, wanting to help your parents while also safeguarding your own financial stability.

Given the circumstances your mother is facing with the current 401k loan and credit card debt, it’s important to consider the risks involved in co-signing another loan for them. The concern you raised about the potential denial of the next 401k loan due to the previous loan not being repaid on time is valid. Lenders typically look at credit history and repayment ability when approving loans, so this could be a factor to consider.

Before making a decision, it might be beneficial to have an open and honest conversation with your parents about their current financial situation and explore other potential solutions. Encouraging them to seek financial counseling or advice from a professional might help them navigate the best course of action moving forward.

While it’s natural to want to help your parents, it’s important to prioritize your own financial well-being. Taking on a $40k loan as a co-signer is a significant responsibility, and it’s crucial to weigh the potential risks involved. Ultimately, your decision should be based on what you feel comfortable with and what aligns with your long-term financial goals.

THE MONEY MINDER wishes you all the best in navigating this challenging situation and finding a solution that works best for both you and your parents.