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 better financial choices by offering you interactive tools and financial calculators that provide objective and unique content. We also allow users to conduct research and compare information for free - so that you can make sound financial decisions. Bankrate has partnerships with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this website are provided by companies who pay us. This compensation could affect how and when products are featured on the site, such as for instance, the order in which they may appear within the listing categories and other categories, unless prohibited by law. Our loans, mortgages, and other home loan products. But this compensation does have no impact on the content we publish or the reviews that you read on this site. We do not include the universe of companies or financial offerings that could be open to you. Oliver Rossi/Getty Images
2 min read published 12 October 2022
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the details of borrowing money to purchase an automobile. Edited 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 feel confident to manage their finances with clear, well-researched information that is broken down into complicated topics into bite-sized pieces. The Bankrate promise
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We receive compensation for the promotion of sponsored goods and, services, or by you clicking on certain hyperlinks on our website. Therefore, this compensation may impact how, where and in what order products are listed, except where prohibited by law. This is the case for our mortgage and home equity products, as well as other products for home loans. Other factors, like our own rules for our website and whether the product is offered in your area or at your self-selected credit score range may also influence the manner in which products appear on this website. We strive to provide an array of offers, Bankrate does not include specific information on each credit or financial product or service. The act of signing off as a cosigner can make vehicle ownership possible for a relative or friend member who might not be eligible for financing without your assistance. But co-signing comes with risk -- since you are both legally responsible for the loan late payments, or default can have an impact on your finances. If the car owner is responsible, co-signing could actually improve your credit. 5 ways to protect yourself as a co-signer Consider these tips to ensure your financial security if you choose to become co-signer for a future . 1. Use co-signers only for your closest friends or family members The biggest risk when being co-signer on a loan co-signer is potential damage to your credit. It is best to aid a family member or friend member who you trust -- someone with a consistent income who is financially stable. It is essential to ensure that the primary borrower is able to repay but they were not eligible due to their lack of financial history or age. 2. Check that your name appears on the vehicle title Co-signers don't hold ownership of the vehicle. This means that how you are named to the loan agreement is important. If you're not named to the title of the vehicle, you may not have a legal claim to the vehicle, however you would be responsible for any future payments. Check that the title identifies that you are the primary owner as well as yourself. The vehicle can't be sold without both parties having their signatures. 3. Make a contract. Although you'll both sign off on the loan in its entirety A separate contract detailing your expectations regarding the primary borrower is an additional layer of security and serves as a reminder of the agreement's severity. This contract need not be complicated. A promissory note describing the cost, obligations, and the consequences of default to both sides. After you both have agreed that you will present the document to a notary in order to have it finalized. 4. Make sure you track monthly payments. One method to feel more confident in the principal borrower's capacity in making payments is to keep track of the schedule of monthly payments. It can be as easy as setting a calendar reminder to monitor their spending. While it may feel awkward but remember that your credit is at risk. Simply reach out and open an exchange to keep track of your friend or family member without micromanaging the loan. 5. Make sure you have enough money to pay the loan. If all else fails, it is essential to ensure that you are able to cover the cost of the loan. If you're unable to pay the lender, your credit score could be in danger -- and you may be in danger of default and possibly legal action. The borrower who is the primary holder has the largest share of the burden, but you are ultimately on the hook for the loan as a co-signer. How co-signing an auto loan affects your credit The risk of co-signing for a car loan are simple though potentially severe. If the person you co-sign for does not pay, your credit score may be in for a major loss and be on the responsibility of paying for the loan. However, there are other potential positive effects to your credit score Credit mix: Depending on your current open credit accounts and the addition of the car loan on your credit file may enhance what's called the credit score. The credit mix comprises 10 percent part of your FICO credit score. History of payments: Just as your score can be lowered when the primary borrower fails to pay on time It is also possible to gain in an insignificant scaleby them making regular timely payments. In the end, acting as co-signer is an important financial decision and could cause financial or interpersonal headaches. For many, it makes the difference between having an automobile or not. If you decide to be a co-signer ensure you are protected and make certain you are able 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 to navigate the ways and pitfalls of taking out loans to purchase an automobile. Edited 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 the confidence to control their finances with clear, well-researched details that cut otherwise complex subjects into bite-sized pieces.
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