Signing off as a co-signer can make vehicle ownership possible for a friend or family member that otherwise may not qualify for financing. But co-signing does come with risk. As you will share equal legal responsibility for the loan, it is important to protect yourself and your finances.
4 ways to protect yourself as a co-signer
Consider these factors to safeguard your financial security if you decide to act as a co-signer on a future auto loan.
1. Serve as a co-signer only for close friends or relatives
The number one risk that comes with acting as a loan co-signer comes down to your credit health being on the line. It is wise to only assist a friend or family member who you trust. This should be someone with a consistent income who is financially stable. Simply, only sign off when you are confident the primary borrower will pay but just didn’t qualify due to their lack of financial history or age.
2. Make sure your name is on the vehicle title
Co-signers do not hold ownership of the vehicle. This means the way you are named on the loan agreement matters. 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 potential payments. Confirm that the title states the primary owner and yourself. This way the vehicle cannot be sold without both parties’ signatures.
3. Create a contract
Although you will both sign off on the loan itself, having a separate contract stating your expectations for the primary borrower can be an added layer of protection and serve as a reminder of the agreement’s severity. This contract doesn’t have to be too complicated. Just a promissory note outlining the costs, obligations and what default will mean for both parties. After you both have agreed, bring it to a notary to have it finalized.
4. Track monthly payments
One way to feel more confident in the primary borrower’s ability to pay is to keep track of the monthly payment schedule. This could be as simple as setting a calendar reminder to check on their spending. While this might feel awkward, remember that your credit is on the line. Simply reach out and open up a conversation to check in on your friend or family member without micromanaging the loan.
How co-signing an auto loan affects your credit
The risks of co-signing a car loan are simple, though potentially severe. If the person you co-sign for doesn’t pay, your credit could take a big hit and you’ll be on the hook for the payments due. But there are also potential benefits:
- Credit mix: Depending on your current open credit accounts, adding a car loan to your credit report could potentially improve what’s referred to as your credit mix. Your credit mix makes up 10 percent of your FICO credit score.
- Payment history: Just as your score could decrease if the primary borrower doesn’t make timely payments, it’s possible to benefit — though on a much smaller scale — from them making consistent on-time payments.
The bottom line
Acting as a co-signer is a big financial decision and could lead to interpersonal or financial headaches. But for many, it means the difference between having a vehicle. So, if you set out to be a co-signer, take the necessary steps to protect yourself. Finally, if the worst-case scenario of loan default does come true be sure you can afford to pay the loan off.