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 better financial decisions by providing you with interactive financial calculators and tools, publishing original and objective content. We also allow you to conduct research and compare data at no cost to help you make informed financial decisions. Bankrate has partnerships with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are displayed on this site are from companies who pay us. This compensation could affect how and when products are listed on this website, for example for instance, the order in which they may appear within the listing categories, except where prohibited by law. This applies to our mortgage, home equity, and other home lending products. But this compensation does affect the information we publish, or the reviews appear on this website. We do not include the universe of companies or financial offers that may be open to you. Oliver Rossi/Getty Images
2 minutes read. Published October 12, 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 ways and pitfalls of taking out loans to purchase cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers gain the confidence to manage their finances by providing clear, well-researched information that is broken down into complex topics into manageable bites. The Bankrate promise
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This compensation could influence the manner, place and when products are listed and categories, unless it is prohibited by law. We also offer mortgage, home equity and other products for home loans. Other elements, like our own rules for our website and whether a product is available within the area you reside in or is within your self-selected credit score range can also impact the manner in which products appear on this website. Although we try to offer an array of offers, Bankrate does not include details about each credit or financial product or service. Co-signing as a customer is a way to make it possible to own a car for a family or friend member who may not qualify for financing without your assistance. However, co-signing is not without risk — since you share the same legal responsibility for the loan late payments, or default could impact your financial situation. However, if the owner of the vehicle is accountable, co-signing can increase your credit score. 5 ways to protect yourself as a co-signer these points to protect your financial security should you decide to act as a co-signer on a future . 1. Serve as a co-signer only for close friends or relatives The main risk when acting as a loan co-signer can cause harm to your credit score. In general, you should aid a family member or friend member you trustthat is, someone who has a regular income that is stable financially. You must be sure that the primary borrower will be able to pay but was not able to do so because of their insufficient financial history or age. 2. Be sure that your name is on the vehicle title Co-signers are not the owners to the car. This means that how you’re listed in the loan agreement matters. If you are not named in the title document, then you might not have a legal claim on the vehicle but would be responsible for potential payments. Verify that the title lists that you are the primary owner as well as yourself. So, the car can’t be transferred without two having their signatures. 3. Create a contract Although you both agree on the loan itself and the contract itself, having a separate one detailing your expectations of the primary borrower can be an added layer of protection and serves as an indicator of the contract’s severity. The contract does not have to be too complicated. It’s just a promissory note that outlines the obligations, costs and what default means each party. After you and your partner have reached an agreement take it to a notary public to be signed. 4. Monitor monthly payments One method to feel more confident in the principal borrower’s capacity to pay is to keep track of the schedule of monthly payments. This could be as simple as setting a reminder in the calendar to monitor their spending. While it may feel awkward, remember that your credit score is at risk. Simply reach out and open up a conversation to inquire about the family member or friend without micromanaging the loan. 5. Be sure to have the funds for payments. When all else fails, it is essential to ensure that you are able to cover the cost of the loan. If you’re unable to pay back the lender, your credit score could be at risk — and you may be in danger of default and possibly legal action. The principal borrower is responsible for the most responsibility however you’re responsible for the loan as a co-signer. How co-signing an auto loan impacts your credit score The risk of co-signing for a car loan are simple though potentially serious. If the person you sign for does not pay, your credit score will be hit hard and you’ll be on responsibility of paying for the loan. However, there are other potential benefits to your credit score: Credit mix: Based on your current open credit accounts, adding the car loan in your credit score could potentially enhance what’s called”your credit mixture. Your credit mix makes up 10% part of your FICO credit score. Payment history: Just as your score can be lowered in the event that the primary borrower does not make timely payments but it is possible to reap benefits but on less of a scaleby them making regular timely payments. The bottom line Acting as a co-signer is a big financial choice that could cause financial or interpersonal problems. But for many, it is the difference between having a vehicle or not. So if you decide to sign a co-signer agreement ensure you are protected and make sure you can afford to pay the loan in case the primary borrower fails to pay. Find out more
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This article is written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers to navigate the ways and pitfalls of borrowing money to purchase an automobile. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances through providing precise, well-researched and well-sourced facts that break down complex topics into manageable bites.
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