How to protect yourself when co-signing a car loan Part Of Financing a Car With a Co-Signer In this series Financing a Car With a Co-Signer Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make smarter financial decisions by offering you interactive financial calculators and tools, publishing original and objective content. We also allow users to conduct research and compare data at no cost – so that you can make sound financial decisions. Bankrate has partnerships with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this site come from companies who pay us. This compensation may impact how and where products appear on this site, including for instance, the order in which they appear within the listing categories and other categories, unless prohibited by law for our loan products, such as mortgages and home equity and other home loan products. This compensation, however, does affect the information we provide, or the reviews you see on this site. We do not contain the vast array of companies or financial offers that may be accessible to you. Oliver Rossi/Getty Images
2 min read published 12 October 2022
Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to buy a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping their readers feel confident to take control of their finances through providing concise, well-studied information that breaks down otherwise complicated topics into bite-sized pieces. The Bankrate promises
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This compensation could affect the way, location and in what order products appear within listing categories in the event that they are not permitted by law. This is the case for our mortgage and home equity products, as well as other home loan products. Other elements, like our own website rules and whether the product is available in the area you reside in or is within your self-selected credit score range can also impact how and where products appear on this site. Although we try to offer an array of offers, Bankrate does not include information about each credit or financial product or service. The act of signing off as a cosigner can make vehicle ownership possible for a relative or friend member who may not qualify to finance without your assistance. However, co-signing is not without the risk that since you share equal legal responsibility for the loan late payments, or default can have an impact on your finances. But if the vehicle owner is accountable, co-signing may actually improve your credit. Five ways to safeguard yourself as a cosigner these factors to safeguard your financial security in the event that you choose to become co-signer for a future . 1. Co-sign only for your closest friends or relatives The main risk that comes with acting as co-signer for a loan co-signer is potential damage to your credit score. In general, you should aid a family member or friend member who you trust — someone with a consistent income that is stable financially. You need to be confident that the primary borrower is able to repay but was not able to do so due to their lack of the financial background or their age. 2. Check that your name appears on the vehicle title Co-signers are not the owners for the automobile. This means the way you’re listed in the loan agreement matters. If you are not named on the title, you may not be able to claim legal rights on the vehicle but would be on the hook for any future payments. Verify that the title lists the primary owner and yourself. This way the vehicle cannot sell without the two parties having their signatures. 3. Make a contract. Although you’ll both sign off on the loan in its entirety and the contract itself, having a separate one stating your expectations regarding the primary borrower is an additional layer of security and serve as an indication of the agreement’s seriousness. The contract does not have to be complex. A promissory note describing the cost, obligations, and what default means for both parties. Once you have both agreed take it to a notary to have it finalized. 4. Make sure you track monthly payments. One method to feel more confident in the primary borrower’s ability to pay is to track the payment schedule for each month. This could be as simple as setting up a reminder on a calendar to monitor the amount they spend. While this might feel awkward however, keep in mind that your credit score is in danger. Just reach out and open up a conversation to check in on the family member or friend without having to manage the loan. 5. Ensure you can afford payments In the event that all else fails it is essential to ensure that you are able to cover the costs of the loan. If you’re unable to pay the lender then your credit score is in trouble — and you may risk default and other legal actions. The borrower who is the primary holder has the most responsibility, but you are ultimately in the middle of the loan as a co-signer. How co-signing an auto loan affects your credit The risks of co-signing a car loan are simple though potentially grave. If the person who you co-sign for isn’t able to pay, your credit may be in for a major loss and you’ll be on the responsibility of paying for the loan. There are also benefits to your credit score: Credit mix: Depending on the credit you have open in your accounts and the addition of a car loan in your credit score may enhance what’s called the credit score. Your credit mix makes up 10 percent of your FICO credit score. Payment history: Just as your score may decrease in the event that the primary borrower does not make timely payments, it’s possible to benefit but on a much smaller scale -by having them make consistent on-time payments. The bottom line : Being a co-signer is a big financial decision that can result in financial or interpersonal problems. For many, it can make the difference between owning an automobile or not. If you decide to sign a co-signer agreement take care to protect yourself and make certain you are able to repay the loan in case the primary borrower fails to pay. Learn more
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This article is written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the ways and pitfalls of borrowing money to purchase a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to take control of their finances by providing clear, well-researched information that breaks down complicated topics into digestible pieces.
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