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 offering you interactive financial calculators and tools, publishing original and objective content, by enabling you to conduct research and compare information for free – 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 Earn Money The deals that are displayed on this site are from companies who pay us. This compensation can affect the way and when products are listed on the site, such as such things as the sequence in which they appear within the listing categories and other categories, unless prohibited by law. Our loan products, such as mortgages and home equity, and other products for home loans. This compensation, however, does have no impact on the information we publish, or the reviews that you see on this site. We do not include the vast array of companies or financial deals that might be accessible to you. Oliver Rossi/Getty Images
2 minutes read. Published 12 October 2022
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in helping readers to navigate the ins and outs of securely taking out loans to purchase a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from 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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Therefore, this compensation may influence the manner, place and in what order items are listed, except where prohibited by law for our mortgage and home equity products, as well as other home loan products. Other factors, like our own website rules and whether the product is offered in the area you reside in or is within your personal credit score could also affect the way and place products are listed on this site. While we strive to provide a wide range offers, Bankrate does not include specific information on each credit or financial item or product. Signing off as a could allow the vehicle to be owned for a relative or friend member who isn’t eligible to finance without your assistance. But co-signing comes with risk — since you are both legally responsible for the loan late payments, or default can impact your financial situation. If the car owner is accountable, co-signing can help improve your credit. Five ways to protect yourself as a co-signer Consider these points to protect your financial security should you decide to be co-signer in the future for a . 1. Co-sign only for close friends and family members The biggest risk when acting as co-signer for a loan co-signer could cause harm to your credit score. It is best to assist a friend or family member whom you trust- someone with a consistent income and a stable financial situation. You need to be confident that the principal borrower can pay but just didn’t qualify because of their lack of financial history or age. 2. Make sure your name is on the title of the vehicle. Co-signers don’t hold ownership for the automobile. This means that how you’re listed to the loan agreement is crucial. If you are not named on the title, you may not have a legal claim on the vehicle but would be on the hook for any future payments. Verify that the title lists the primary owner and yourself. So, the car can’t sell without the two’ signatures. 3. Make a contract. Although you will both sign off on the loan itself and the contract itself, having a separate one that outlines your expectations regarding the primary borrower can be an added layer of protection and serves as a reminder of the agreement’s importance. This contract doesn’t have to be too complex. A promissory note describing the obligations, costs and what default will mean to both sides. After you both have agreed, bring it to a notary to get it signed. 4. Monitor monthly payments One method to feel more confident in the principal borrower’s capacity in making payments is to keep track of the payment schedule for each month. It can be as easy as setting a reminder in the calendar to keep track of their expenditure. Although this may be uncomfortable, remember that your credit score is in danger. Reach out and start up a conversation to keep track of your friend or family member without supervising the loan. 5. Be sure to have the funds for payments. If all else fails, it is essential to ensure that you are able to cover the cost of the loan. If you’re not able to pay the lender, your credit score is at risk — and you may be at risk of default or other legal actions. The borrower who is the primary holder has the largest share of the burden, but you are ultimately in the middle of the loan as a co-signer. What happens when you co-sign an auto loan impacts your credit score The risks of co-signing a car loan are not difficult, but they could be grave. If the person you sign for does not pay, your credit score could take a big hit and you’ll be on hook for paying the loan. However, there are other potential advantages for your credit score. Credit mix: Depending on the credit you have open in your accounts, adding a car loan to your credit report may increase what’s known as the credit score. The credit mix comprises 10 percent part of your FICO credit score. History of payments: Just as your score can be lowered in the event that the primary borrower does not pay on time, it’s possible to benefit but on less of a scaleby them making regular on-time payments. The bottom line Acting as co-signer is an important financial decision and could cause financial or interpersonal headaches. However, for many, it makes the difference between owning an automobile or not. So if you decide to co-sign the loan take care to protect yourself and make certain that you have the funds to repay the loan in the event that the principal borrower fails to pay. Learn more
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the ins and outs of securely taking out loans to purchase a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain confidence to control their finances with clear, well-researched information that breaks down complex subjects into bite-sized pieces.
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