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 offering you interactive tools and financial calculators that provide objective and unique content, by enabling users to conduct research and compare data at no cost and help you make financial decisions with confidence. 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 products that appear on this site come from companies that pay us. This compensation may impact how and where products appear on this website, for example, for example, the order in which they may appear in the listing categories and other categories, unless prohibited by law. Our mortgage, home equity, and other products for home loans. However, this compensation will have no impact on the content we publish or the reviews that appear on this website. We do not cover the vast array of companies or financial offers that may be accessible to you. Oliver Rossi/Getty Images
2 minutes read. Published October 12, 2022
Writer: Rebecca Betterton 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 taking out loans to purchase a car. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers feel confident to manage their finances by providing precise, well-researched and well-informed information that is broken down into complex subjects into digestible pieces. The Bankrate promises
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Therefore, this compensation may impact how, where and in what order items appear in listing categories and categories, unless it is prohibited by law. We also offer mortgage and home equity products, as well as other products for home loans. Other factors, like our own rules for our website and whether a product is available in your region or within your self-selected credit score range could also affect the manner in which products appear on this website. Although we try to offer an array of offers, Bankrate does not include details about every financial or credit item or product. Signing off as a is a way to make it possible to own a car for a relative or friend member who isn’t eligible for financing without your assistance. But co-signing carries a the risk that since you share equal legal responsibility for the loan and missed payments. default could have an impact on your finances. However, if the owner of the vehicle is accountable, co-signing can actually improve your credit. Five ways to protect yourself as a co-signer these points to protect your financial security if you choose to become co-signer for a future . 1. Serve as a co-signer only for close friends and family members The biggest risk when acting as a loan co-signer is potential harm to your credit score. In general, you should aid a family member or friend member whom you trustone with a steady income and a stable financial situation. You must be sure 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. Check that your name appears on the title of the vehicle. Co-signers do not hold ownership of the vehicle. This means that the way you’re listed on the loan agreement matters. If you’re not named on the title, you may not have a legal claim to the vehicle, but you could be on the hook for future installments. Confirm that the title states that you are the primary owner as well as yourself. This way the vehicle cannot sell without the two’ signatures. 3. You should draft a contract. While you’ll both sign off on the loan in its entirety A separate contract stating your expectations of the primary borrower can be an additional layer of security and act as a reminder of the agreement’s seriousness. This contract doesn’t have to be too complex. A promissory note describing the cost, obligations, and what default means for both parties. After you both have agreed take the document to a notary in order to get it signed. 4. Monitor monthly payments One method to increase confidence in the primary borrower’s ability of paying is to track the schedule of monthly payments. It could be as easy as setting a reminder in the calendar to monitor the amount they spend. Although this may be uncomfortable however, keep in mind that your credit score is at risk. Just reach out and open up a conversation to check in on the family member or friend without micromanaging the loan. 5. Be sure to have the funds for payments. In the event that all else fails it is essential to ensure that you will be able to pay the cost of the loan. If you’re unable to pay the lender and your credit score will be at risk — as well as the fact that you could risk default and other legal actions. The primary borrower has the majority of the responsibility however you’re on the hook for the loan as a co-signer. What happens when you co-sign an auto loan affects your credit The risks of co-signing a car loan aren’t difficult but could be grave. If the person who you co-sign for isn’t able to pay, your credit will be hit hard and be on the hook for paying the loan. However, there are other potential advantages to your credit score Credit mix: Based on the credit you have open in your accounts and the addition of the car loan in your credit score may improve what’s referred to as your credit mix. Your credit mix is 10% part of your FICO credit score. Pay history: While your score may decrease in the event that the primary borrower does not make timely payments It is also possible to gain — though on less of a scale- from them making consistent timely payments. The bottom line : Being co-signer is an important financial decision and could cause financial or interpersonal difficulties. However, for many, it can make the difference between having a vehicle or not. If you choose to co-sign the loan 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
Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the ways and pitfalls of taking out loans to purchase an automobile. Written 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 control their finances by providing concise, well-researched, and clear information that breaks down complicated topics into digestible pieces.
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