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 goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators as well as publishing authoritative and original content. We also allow you to conduct your own research and compare data at no cost – so that you can make financial decisions with confidence. Bankrate has agreements with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site come from companies that compensate us. This compensation can affect the way and where products appear on this website, for example such things as the order in which they appear within the listing categories, except where prohibited by law. Our mortgage, home equity, and other home loan products. This compensation, however, does not influence the content we publish or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be open to you. Oliver Rossi/Getty Images
2 min read published October 12, 2022
Written by Rebecca Betterton 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 taking out loans to purchase a car. 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 committed to helping readers gain the confidence to manage their finances through providing concise, well-studied information that is broken down into complex subjects into digestible pieces. The Bankrate promise
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This compensation could affect the way, location and when products are listed, except where prohibited by law. This is the case for our mortgage and home equity products, as well as other home loan products. Other factors, such as our own rules for our website and whether the product is available in the area you reside in or is within your own personal credit score can also impact the manner in which products appear on this site. Although we try to offer a wide range offers, Bankrate does not include details about each credit or financial item or product. Co-signing as a customer is a way to make it possible to own a car for a friend or family member who may not qualify for financing without your help. But co-signing comes with the risk that since you share the same legal responsibility for the loan and missed payments. default will affect your finances. But if the vehicle owner is responsible, co-signing could help improve your credit. Five ways to safeguard yourself as a co-signer Consider these tips to ensure your financial security in the event that you decide to be co-signer for a future . 1. Use co-signers only for close friends or relatives A big risk when acting as co-signer on a loan co-signer could cause harm to your credit score. In general, you should aid a family member or friend member whom you trustthat is, someone who has a regular income who is financially stable. It is essential to ensure that the borrower in question will be able to pay but they were not eligible due to their lack of credit history or financial stability. 2. Make sure your name is on the vehicle title Co-signers do not hold ownership for the automobile. This means that the way you are named on the loan agreement matters. If you’re not named to the title of the vehicle, you might not have a legal claim to the vehicle, however you would be responsible for future installments. Confirm that the title states the primary owner and yourself. This way the vehicle cannot sell without the two parties’ signatures. 3. Make a contract. Although you will both sign off on the loan in its entirety and the contract itself, having a separate one stating your expectations of the principal borrower could be an additional layer of security and serve as an indicator of the contract’s severity. This contract doesn’t have to be complicated. A promissory note describing the cost, obligations, and the consequences of default to both sides. After you both have agreed that you will present it to a notary to have it finalized. 4. Monitor monthly payments One method to increase confidence in the primary borrower’s ability in making payments is to monitor the payment schedule for each month. This could be as simple as setting a reminder in the calendar to keep track of their spending. While this might feel awkward, remember that your credit score is on the line. Just reach out and open up a conversation to inquire about your friend or family member without micromanaging the loan. 5. Ensure you can afford payments When all else fails, you need to know that you will be able to pay the cost of the loan. If you are not able to pay back the lender then your credit score could be in trouble — and you could be in danger of default and possibly legal action. The principal borrower is responsible for the largest share of the burden however, you’re ultimately responsible for the loan as co-signer. What happens when you co-sign an auto loan impacts your credit score The dangers of co-signing a vehicle loan are simple though potentially serious. If the person you sign for does not pay, your credit score could take a big hit and you’ll be on the responsible for the loan. There are also positive effects for your credit score. Credit mix: Depending on your current open credit accounts and the addition of an auto loan in your credit score may improve what’s referred to as the credit score. Your credit mix makes up 10% of your FICO credit score. Pay history: While your score can be lowered in the event that the primary borrower does not make timely payments, it’s possible to benefit — though on an insignificant scaleby them making regular timely payments. In the end, acting as co-signer can be a major financial choice that could cause financial or interpersonal headaches. But for many, it makes the difference between owning a vehicle or not. If you choose to co-sign the loan take care to protect yourself and make certain you are able to pay the loan in case the primary borrower defaults. Find out 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 in navigating the ways and pitfalls of borrowing money to buy cars. 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 by providing clear, well-researched details that cut complex subjects into bite-sized pieces.
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