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 providing you with interactive tools and financial calculators, publishing original and objective content. We also allow you to conduct your own research and compare data at no cost – so that you can make informed financial decisions. Bankrate has agreements with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this site are from companies that pay us. This compensation can affect the way and when products are featured on this site, including, for example, the order in which they appear in the listing categories in the event that they are not permitted by law. Our loan products, such as mortgages and home equity, and other home loan products. However, this compensation will have no impact on the information we provide, or the reviews that appear on this website. We do not cover the vast array of companies or financial offers that may be open to you. Oliver Rossi/Getty Images
2 min read published October 12, 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 a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances with clear, well-researched information that is broken down into complex topics into manageable bites. The Bankrate promises
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This compensation could influence the manner, place and when products appear in listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, like our own proprietary website rules and whether the product is offered in your area or at your self-selected credit score range may also influence how and where products appear on this site. While we strive to provide the most diverse selection of products, Bankrate does not include information about every credit or financial products or services. The act of signing off as a cosigner is a way to make it possible to own a car for a friend or family member who might not be eligible to finance without your assistance. But co-signing carries a risk — since you share the same legal responsibility for the loan and missed payments. default will affect your finances. However, if the owner of the vehicle is responsible, co-signing could help improve your credit. 5 ways to protect yourself as a co-signer Consider these tips to ensure your financial security in the event that you decide to be co-signer for a future . 1. Serve as a co-signer only for your closest friends or relatives A big danger of being a loan co-signer is potential harm to your credit score. It is best to aid a family member or friend member you trust- someone with a consistent income that is stable financially. You need to be confident that the principal borrower is able to repay but just didn’t qualify because of their insufficient financial history or age. 2. Make sure your name is on the title of the vehicle. Co-signers are not the owners to the car. This means that how you are named to the loan agreement is important. If you are not named to the title of the vehicle, you might not have a legal claim on the vehicle but would be responsible for potential payments. Verify that the title lists you as the owner of the vehicle and not the primary one. The vehicle can’t be sold without both’ signatures. 3. You should draft a contract. While you will both sign off on the loan itself A separate contract that outlines your expectations for the primary borrower can be an added layer of protection and serves as an indication of the agreement’s severity. This contract need not be overly complex. It’s just a promissory note that outlines the obligations, costs and what default means each party. Once you have both agreed that you will present it to a notary public to have it finalized. 4. Make sure you track monthly payments. One method to feel more confident in the principal borrower’s capacity of paying is to track the schedule of monthly payments. It can be as easy as setting a reminder in the calendar to keep track of their expenditure. While it may feel awkward, remember that your credit score is in danger. Reach out and start up a conversation to keep track of the family member or friend without having to manage the loan. 5. Make sure you have enough money to pay the loan. When 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 pay back the lender and your credit score could be in danger — as well as the fact that you may risk default and other legal action. The primary borrower has the most responsibility, but you are ultimately in the middle of the loan as a co-signer. How co-signing an auto loan can affect your credit risk of co-signing for a car loan are simple though potentially grave. If the person you co-sign for isn’t able to pay, your credit could take a big hit and you’ll be on the responsible for the loan. However, there are other potential positive effects for your credit score. Credit mix: Based on your current open credit accounts including a car loan on your credit file could potentially enhance what’s called your credit mix. The credit mix comprises 10% part of your FICO credit score. Payment history: Just as your score may decrease if the primary borrower doesn’t pay on time It is also possible to gain — though on an insignificant scale- from them making consistent timely payments. The bottom line Acting as a co-signer is a big financial decision and could result in financial or interpersonal difficulties. But for many, it is the difference between owning a vehicle or not. If you decide to co-sign the loan, protect yourself and be certain you are able to pay the loan in the event that the principal borrower fails to pay. Learn more
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the ways and pitfalls of taking out loans to purchase a car. 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 readers gain the confidence to manage their finances with precise, well-researched and well-sourced details that cut complicated topics into digestible pieces.
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