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Signing off as a co-signer on an auto loan for a friend or family member with no or poor credit can provide them with the ability to finance their own vehicle. But this comes with added risks for you as the co-signer and is typically not a good idea. Before agreeing, it is important to understand the implications that come with being a co-signer.
When is co-signing for a car loan a good idea?
Serving as a co-signer is a good idea if your relationship is strong and can survive financial pressure, you can track monthly payments, can afford to pay off the loan if necessary and can handle a long-term financial commitment. In any other case, it may be worth trying to help your friend or family member find other options.
When is co-signing a car a bad idea?
It is not a great idea to act as a co-signer for a car loan unless you are sure of the applicant’s ability to make payments. Suppose the applicant isn’t paying on time, or you feel you must monitor their spending as it relates to the co-signed loan. That could put your relationship in choppy waters. The combination of possible drama and default means that co-signing a car loan is a choice that carries significant risk.
Responsibilities of the co-signer
If you’re considering co-signing a loan, be aware of your responsibilities.
- Paying off the loan: As a co-signer, you have equal legal responsibility for paying off the loan without having full ownership of the vehicle or the monthly payments. This differs from co-borrowing, where both parties hold ownership of the vehicle.
- Missed payments: If your primary borrower doesn’t make a payment, you will be held responsible and must step in and make the payments.
- Late fees: Along with making missed payments, as a co-signer, you’re also on the hook for any late fees and the cost of repossessing the vehicle.
Questions to consider before signing off as a co-signer
If you want to agree to the responsibilities of being a co-signer, consider these factors first to protect your finances.
Can your relationship survive a financial burden?
Before agreeing to be a co-signer on a friend or family member’s loan, determine if your relationship can handle a shared financial burden. Conversations about money can strain any relationship, but when legal responsibilities join the mix, it can turn even messier.
Are you able to keep track of the monthly payments?
As a co-signer, you will feel inclined to check in on the monthly payments to ensure that you will not have to pay the entirety of the loan. This might result in some uncomfortable conversations. Keep in mind that lenders do not have to inform you if payments are late or missed. You will likely feel added stress to check in, given your credit is on the line too.
Can you afford to pay off the loan if needed?
Worst case scenario as a co-signer means having to pay off the loan on your own if the primary borrower does not. Before agreeing to take responsibility for the loan, be sure that the amount is a number that can realistically fit your budget. Otherwise, you could be placing yourself in a potentially risky financial situation.
Do you want to agree to a long-term financial burden?
Loans are not usually short-term — and when it comes to auto, they can last up to 84 months. As a co-signer, you will be signing off on a long-term financial relationship. And although it is possible to leave a co-signed loan, it is a complicated process, so determine if you are willing to commit to this agreement before agreeing.
The bottom line
The decision to sign on as a co-signer comes down to the trust you have in the primary borrower. If you believe they will meet their payments and are willing to risk your own finances, then helping a friend or family member may be the right thing to do. Otherwise, it is best to say no to this agreement. Instead, encourage them to find other ways to get behind the wheel with poor credit.
Co-signing a car loan can affect your credit if a hard inquiry is conducted during the application process. Your credit score may decline slightly. In addition, a default will severely impact your credit However, co-signing an auto loan can also boost your credit if the loan is managed responsibly.
When you co-sign a loan, it can impact your ability to qualify for a mortgage. Even though you’re not the one making the auto loan payments, a lender will consider the monthly auto loan payments when calculating your debt-to-income ratio (DTI). Your DTI greatly affects your eligibility for a mortgage and the mortgage interest rate you’re offered. In the worst-case scenario, if your DTI ratio is too high because of the auto loan you co-signed, you may be ineligible for the mortgage.