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 financial calculators and tools, publishing original and objective content. This allows users to conduct research and compare information for free – so that you can make financial decisions with confidence. Bankrate has agreements with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that appear on this site are from companies who pay us. This compensation may impact how and when products are featured on this website, for example for instance, the order in which they be listed within the categories of listing in the event that they are not permitted by law. Our loan products, such as mortgages and home equity and other products for home loans. However, this compensation will not influence the information we provide, or the reviews 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 on October 12, 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 to navigate the details of taking out loans to purchase an automobile. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping their readers gain the confidence to take control of their finances with clear, well-researched facts that break down complex subjects into digestible pieces. The Bankrate promises
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We are compensated in exchange for the promotion of sponsored goods and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may influence the manner, place and in what order products are listed in the event that they are not permitted by law for our mortgage, home equity and other home loan products. Other factors, such as our own rules for our website and whether the product is available within your area or at your own personal credit score may also influence the manner in which products appear on this site. Although we try to offer the most diverse selection of products, Bankrate does not include details about each credit or financial item or product. The act of signing off as a cosigner could allow the vehicle to be owned for a friend or family member who may not qualify for financing without your help. However, co-signing is not without risks, as you share the same legal responsibility for the loan, missed payments or default can have an impact on your finances. If the car owner is responsible, co-signing could help improve your credit. Five ways to protect yourself as a co-signer Consider these factors to safeguard your financial security should you choose to become co-signer for a future . 1. Serve as a co-signer only for close friends and relatives The main risk that comes with acting as co-signer for a loan co-signer can cause harm to your credit score. In general, you should help a family or friend member you trustone with a steady income and a stable financial situation. It is essential to ensure that the principal borrower can pay but they were not eligible because of their lack of financial history or age. 2. Check that your name appears on the title of the vehicle. Co-signers do not hold ownership to the car. This means that the way you are named in 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, however you would be on the hook for any future payments. Check that the title identifies that you are the primary owner as well as yourself. This way the vehicle cannot be sold without both with their signatures. 3. Create a contract Although you’ll both sign off on the loan itself and the contract itself, having a separate one detailing your expectations for the primary borrower is an added layer of protection and serve as an indication of the agreement’s importance. The contract does not have to be complex. A promissory note describing the cost, obligations, and the consequences of default to both sides. After you both have agreed take the document to a notary in order to be signed. 4. Monitor monthly payments One method to feel more confident in the principal borrower’s capacity of paying is to monitor the schedule of monthly payments. It could be as easy as setting a calendar reminder to check on their expenditure. Although this may be uncomfortable however, keep in mind that your credit is on the line. Just reach out and open up a conversation to keep track of your family member or friend without supervising the loan. 5. Ensure you can afford payments In the event that all else fails you must ensure that you will be able to pay the payments on the loan. If you are not able to repay the lender then your credit score is at risk — and you may be at risk of default or other legal actions. The borrower who is the primary holder has the most responsibility, but you are ultimately on the hook for the loan as a co-signer. What happens when you co-sign an auto loan affects your credit The risk of co-signing for a car loan aren’t difficult but could be serious. If the person who you co-sign for does not pay, your credit score will be hit hard and you’ll be on the responsible for the loan. However, there are other potential advantages to your credit score Credit mix: Depending on your current open credit accounts, adding the car loan in your credit score could potentially increase what’s known as”your credit mixture. Your credit mix makes up 10% of the FICO credit score. Payment history: Just as your score may decrease in the event that the primary borrower does not make timely payments It is also possible to gain in less of a scaleby them making regular on-time payments. The bottom line : Being co-signer is an important financial decision that can result in financial or interpersonal headaches. However, for many, it is the difference between owning a vehicle or not. So if you decide to sign a co-signer agreement ensure you are protected and make certain that you have the funds to repay the loan in case the primary borrower fails to pay. 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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the ins and outs of securely borrowing money to buy cars. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to manage their finances with precise, well-researched and well-sourced information that breaks down complex topics into manageable bites.
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