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 mission is to help you make smarter financial decisions by providing you with interactive tools and financial calculators that provide objective and unique content. We also allow you to conduct your own research and compare data for free – so that you can make informed 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 deals that are displayed on this website are provided by companies that compensate us. This compensation can affect the way and when products are listed on this website, for example for instance, the order in which they may appear within the listing categories and other categories, unless prohibited by law. Our loan products, such as mortgages and home equity and other home lending products. This compensation, however, does have no impact on the information we publish, or the reviews you read on this site. We do not contain the entire universe of businesses or financial offers that may be open to you. Oliver Rossi/Getty Images
2 minutes read. Published 12 October 2022
Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in helping readers with the ways and pitfalls of borrowing money to buy an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers feel confident to control their finances with clear, well-researched facts that break down complex topics into manageable bites. The Bankrate promises
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So, this compensation can impact how, where and when products appear within listing categories and categories, unless it is prohibited by law. This is the case for our mortgage, home equity and other home lending products. Other factors, like our own rules for our website and whether a product is available within your region or within your own personal credit score may also influence how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about each credit or financial product or service. Signing off as a could allow the vehicle to be owned for a relative or friend member who might not be eligible to finance without your assistance. However, co-signing is not without risks, as you share the same legal responsibility for the loan, missed payments or default will have an impact on your finances. If the car owner is accountable, co-signing may actually improve your credit. Five ways to protect yourself as a cosigner these factors to safeguard your financial security should you decide to be co-signer in the future for a . 1. Co-sign only for close friends or family members The biggest risk when co-signing as a loan co-signer is potential damage to your credit. Ideally, you should only aid a family member or friend member whom you trust- someone with a consistent income and a stable financial situation. You need to be confident that the borrower in question is able to repay but was not able to do so due to their lack of the financial background or their age. 2. Be sure that your name is on the vehicle title Co-signers do not hold ownership of the vehicle. This means that the way you are named in the loan agreement is crucial. If you’re not named to the title of the vehicle, you might not have a legal claim to the vehicle, but you could be on the hook for future installments. Confirm that the title states you as the owner of the vehicle and not the primary one. So, the car can’t be sold without both parties having their signatures. 3. You should draft a contract. While you both agree on the loan itself, having a separate contract detailing your expectations for the principal borrower could be an additional layer of security and serves as an indication of the agreement’s seriousness. This contract doesn’t have to be complex. It’s just a promissory note that outlines the costs, obligations and what default will mean to both sides. After you both have agreed that you will present the document to a notary in order to be signed. 4. Monitor monthly payments One method to be more confident about the principal borrower’s capacity to pay is to monitor the payment schedule for each month. It could be as easy as setting a calendar reminder to keep track of the amount they spend. While it may feel awkward, remember that your credit score is at risk. Simply reach out and open up a conversation to keep track of your friend or family member without micromanaging the loan. 5. Make sure you have enough money to pay the loan. In the event that all else fails you must ensure that you can cover the payments on the loan. If you’re not able to pay the lender and your credit score will be in danger as you could be at risk of default or other legal actions. The borrower who is the primary holder has the largest share of the burden however you’re in the middle of the loan as co-signer. How co-signing an auto loan can affect your credit dangers of co-signing a vehicle loan aren’t difficult but could be severe. If the person who you co-sign for does not pay, your credit score will be hit hard and you’ll be on the responsible for the loan. There are also advantages for your credit score. Credit mix: Based on the credit you have open in your accounts, adding a car loan on your credit file can increase what’s known as the credit score. Your credit mix is 10% part of your FICO credit score. Pay history: While your score can be lowered if the primary borrower doesn’t pay on time but it is possible to reap benefits in an insignificant scaleby them making regular punctual payments. The bottom line Acting as a co-signer is a big financial decision and could lead to interpersonal or financial difficulties. For many, it is the difference between having a vehicle or not. If you decide to sign a co-signer agreement, protect yourself and be certain that you have the funds to repay the loan in the event that the primary co-signer defaults. Find out more
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the ins and outs of securely borrowing money to purchase a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to take control of their finances by providing clear, well-researched facts that break down otherwise complicated topics into digestible pieces.
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