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 mission is to help you make better financial decisions by providing you with interactive tools and financial calculators that provide objective and unique content. This allows users to conduct research and compare data for free to help you make sound financial decisions. Bankrate has agreements with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this site come from companies who pay us. This compensation could affect how and where products appear on this website, for example for instance, the sequence in which they be listed within the categories of listing, except where prohibited by law. This applies to our mortgage, home equity, and other products for home loans. This compensation, however, does affect 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 available to you. Oliver Rossi/Getty Images
2 minutes read. Published October 12, 2022
Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in helping readers in navigating the details of borrowing money to buy cars. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping their readers feel confident to manage their finances through providing precise, well-researched and well-informed facts that break down complex subjects into digestible pieces. The Bankrate guarantee
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Therefore, this compensation may influence the manner, place and in what order items appear in listing categories, except where prohibited by law. This is the case for our mortgage, home equity and other home loan products. Other elements, like our own rules for our website and whether a product is available in your region or within your own personal credit score could also affect the manner in which products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about each credit or financial product or service. Co-signing as a customer can make vehicle ownership possible for a family or friend member who might not be eligible to finance without your assistance. But co-signing comes with risk — since you share the same legal responsibility for the loan, missed payments or default will 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 co-signer Consider these factors to safeguard your financial security if you decide to act as a co-signer on a future . 1. Serve as a co-signer only for close friends or relatives A big danger of co-signing as co-signer for a loan co-signer is potential damage to your credit. Ideally, you should only assist a friend or family member you trust- someone with a consistent income who is financially stable. It is essential to ensure that the borrower in question will be able to pay but they were not eligible because of their lack of credit history or financial stability. 2. Make sure your name is on the vehicle title Co-signers don’t hold ownership of the vehicle. This means that how you are named on the loan agreement matters. If you’re not listed in the title document, then you might not be able to claim legal rights to the vehicle, but you could be on the hook 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 transferred without two with their signatures. 3. You should draft a contract. While you will both sign off on the loan in its entirety and the contract itself, having a separate one that outlines your expectations of the primary borrower is an additional layer of security and act as an indicator of the contract’s severity. The contract does not have to be too complicated. It’s just a promissory note that outlines the costs, obligations and the consequences of default for both parties. After you and your partner have reached an agreement that you will present it to a notary public to be signed. 4. Make sure you track monthly payments. One method to be more confident about the ability of the borrower to pay is to keep track of the schedule of monthly payments. It can be as easy as setting a reminder in the calendar to keep track of their expenditure. Although this may be uncomfortable however, keep in mind that your credit is at risk. Reach out and start the conversation to check in on your friend or family member without having to manage the loan. 5. Be sure to have the funds for payments. In the event that all else fails you need to know that you can cover the costs of the loan. If you are not able to pay the lender and your credit score will be in trouble — and you could risk default and other legal actions. The principal borrower is responsible for the majority of the responsibility however, you’re ultimately on the hook for the loan as co-signer. How co-signing an auto loan impacts your credit score The risks of co-signing a car loan are simple though potentially serious. If the person who you co-sign for doesn’t pay, your could take a big hit and you’ll be on hook for paying the loan. There are also benefits to your credit score Credit mix: Depending on the current credit accounts including an auto loan to your credit report could potentially enhance what’s called the credit score. The credit mix comprises 10% part of your FICO credit score. Pay history: While your score may decrease if the primary borrower doesn’t pay on time but it is possible to reap benefits — though on a much smaller scale — from them making consistent on-time payments. In the end, acting as co-signer is an important financial decision and could result in financial or interpersonal problems. For many, it can make the difference between owning an automobile or not. If you choose to sign a co-signer agreement, protect yourself and be sure you can afford to pay 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 with the details of borrowing money to purchase a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to control their finances with concise, well-researched, and clear details that cut complex topics into manageable bites.
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