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.

Responsibilities of the co-signer

As a co-signer, you hold 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. As the co-signer, one can assume that you hold a better credit history and act as an added layer of security for the lender.

But it can get tricky if your primary borrower doesn’t make a payment. In this case, you will be held responsible. This means you will be on the hook to pay off the loan itself, any late fees and the cost to repossess the vehicle. Along with this, your A+ credit may take a hit if payment is missed — making future credit applications for you a challenge.

Is co-signing a car loan a good idea?

This answer is specific to each situation, but typically it is not a great idea to act as a co-signer for a car loan unless you are absolutely sure of the applicant’s ability to make payments. It can put you and your friend or family member in choppy waters if, for example, they aren’t paying on time, or you feel that you must monitor their spending as it relates to the co-signed loan. The combination of possible drama and risk of default means that co-signing a car loan is a choice that carries a large amount of risk.

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.

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 put a strain on a relationship in any case but when legal responsibilities are added into 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 so 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 realistically can fit in 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 to a long-term financially bound 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 and encourage them to find other ways to get behind the wheel with poor credit.

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