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 aim is to assist you make better financial choices by offering you interactive financial calculators and tools as well as publishing authoritative and original content. We also allow you to conduct your own research and compare data for free to help you make sound financial decisions. 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 website are provided by companies that compensate us. This compensation can affect the way and where products appear on this site, including for instance, the sequence in which they appear within the listing categories and other categories, unless prohibited by law. This applies to our mortgage, home equity, and other home lending products. However, this compensation will have no impact on the information we provide, or the reviews that you see on this site. We do not contain the universe of companies or financial deals that might be open to you. Oliver Rossi/Getty Images
2 min read Published 12 October 2022
Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the ways and pitfalls of borrowing money to buy an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping their readers feel confident to take control of their finances through providing concise, well-studied information that is broken down into complicated topics into bite-sized pieces. The Bankrate promise
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Therefore, this compensation may affect the way, location and in what order items appear in listing categories in the event that they are not permitted by law. This is the case for our mortgage or home equity, and other home loan products. Other elements, like our own proprietary website rules and whether a product is available within the area you reside in or is within your own personal credit score could also affect the manner in which products appear on this website. Although we try to offer the most diverse selection of products, Bankrate does not include information about each credit or financial product or service. The act of signing off as a cosigner can make vehicle ownership possible for a friend or family member who might not be eligible to finance without your assistance. But co-signing comes with the risk that since you share equal legal responsibility for the loan late payments, or default could affect your finances. However, if the owner of the vehicle is accountable, co-signing may increase your credit score. Five ways to safeguard yourself as a cosigner these tips to ensure your financial security if you choose to become a co-signer on a future . 1. Serve as a co-signer only for your closest friends or family members The biggest risk that comes with acting as co-signer for a loan co-signer could cause damage to your credit. In general, you should help a family or friend member who you trust -- someone with a consistent income that is stable financially. You need to be confident that the primary borrower will be able to pay but just didn't qualify because of their lack of credit history or financial stability. 2. Make sure your name is on the title of the vehicle. Co-signers are not the owners of the vehicle. This means the way you're named to the loan agreement matters. If you are not named to the title of the vehicle, you might not be able to claim legal rights to the vehicle, but you could be responsible for any future payments. Check that the title identifies that you are the primary owner as well as yourself. So, the car can't be transferred without two' signatures. 3. Make a contract. Although you'll both sign off on the loan in its entirety and the contract itself, having a separate one that outlines your expectations regarding the principal borrower could be an added layer of protection and act as an indicator of the contract's seriousness. This contract need not be too complicated. A promissory note describing the obligations, costs and what default means to both sides. After you both have agreed that you will present it to a notary to get it signed. 4. Make sure you track monthly payments. One method to increase confidence in the principal borrower's capacity in making payments is to monitor the schedule of monthly payments. It can be as easy 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 the conversation to check in on the family member or friend without having to manage the loan. 5. Make sure you have enough money to pay the loan. If all else fails, it is essential to ensure that you will be able to pay the costs of the loan. If you're unable to repay the lender then your credit score will be at risk -- as well as the fact that you may risk default and other legal action. The primary borrower has the most responsibility however you're in the middle of the loan as a co-signer. Co-signing an auto loan affects your credit The dangers of co-signing a vehicle loan aren't difficult but could be grave. If the person you sign for isn't able to pay, your credit may be in for a major loss and you'll be on the responsibility of paying for the loan. But there are also potential positive effects for your credit score. Credit mix: Based on your current open credit accounts, adding the car loan to your credit report can increase what's known as the credit score. The credit mix comprises 10 percent of the FICO credit score. History of payments: Just as your score can be lowered when the primary borrower fails to pay on time, it's possible to benefit in an insignificant scaleby having them make consistent timely payments. The bottom line : Being co-signer can be a major financial choice that could lead to interpersonal or financial difficulties. However, for many, it makes the difference between owning an automobile or not. If you decide to be a co-signer ensure you are protected and make certain that you have the funds to repay the loan in the event that the primary co-signer defaults. Learn more
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This article is 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 purchase an automobile. 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 gain the confidence to take control of their finances through providing concise, well-researched, and clear details that cut complex subjects into bite-sized pieces.
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