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 choices by providing you with interactive financial calculators and tools, publishing original and objective content. This allows you to conduct research and compare data at no cost - 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 offers that appear on this website are provided by companies who pay us. This compensation may impact how and when products are listed on this site, including, for example, the sequence in which they appear within the listing categories in the event that they are not permitted by law. This applies to our mortgage, home equity, and other home loan products. This compensation, however, does have no impact on the information we publish, or the reviews appear on this website. We do not include the entire universe of businesses or financial offerings that could be available 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 specializes in helping readers with the ways and pitfalls of borrowing money to purchase an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers to take control of their finances with concise, well-studied information that breaks down otherwise 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 products appear in listing categories and categories, unless it is prohibited by law. This is the case for our mortgage and home equity products, as well as other home loan products. Other factors, like our own proprietary website rules and whether or not a product is offered in the area you reside in or is within your personal credit score could also affect how and where products appear on this website. While we strive to provide an array of offers, Bankrate does not include specific information on every financial or credit product or service. Co-signing as a customer is a way to make it possible to own a car for a friend or family member who might not be eligible for financing without your help. But co-signing comes with risk -- since you share equal legal responsibility for the loan and missed payments. default will have an impact on your finances. But if the vehicle owner is responsible, co-signing could increase your credit score. 5 ways to protect yourself as a co-signer Consider these points to protect your financial security if you choose to become co-signer for a future . 1. Serve as a co-signer only for close friends or relatives The main risk when acting as a loan co-signer could cause harm to your credit score. It is best to aid a family member or friend member whom you trustthat is, someone who has a regular income who is financially stable. It is essential to ensure that the principal borrower can pay but they were not eligible because of their insufficient credit history or financial stability. 2. Check that your name appears on the vehicle title Co-signers do not hold ownership of the vehicle. This means the way you're listed on the loan agreement is important. If you are not named to the title of the vehicle, you may not have a legal claim to the vehicle, however you would be on the hook for future installments. Confirm that the title states you as the owner of the vehicle and not the primary one. So, the car can't be sold without both having their signatures. 3. You should draft a contract. While you'll both sign off on the loan itself, having a separate contract that outlines your expectations regarding the principal borrower could be an additional layer of security and serves as an indication of the agreement's seriousness. This contract need not be overly complex. It's just a promissory note that outlines the costs, obligations and what default means for both parties. After you both have agreed that you will present it to a notary public to be signed. 4. Track monthly payments One way to feel more confident in the ability of the borrower of paying is to monitor the schedule of monthly payments. It can be as easy as setting a calendar reminder to check on their spending. While this might feel awkward, remember that your credit is on the line. Simply reach out and open 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. If all else fails, you need to know that you can cover the payments on the loan. If you are not able to pay back the lender then your credit score is at risk -- and you may be at risk of default or other legal action. The borrower who is the primary holder has the majority of the responsibility, but you are ultimately in the middle of the loan as co-signer. What happens when you co-sign an auto loan impacts your credit score The risk of co-signing for a car loan are simple though potentially grave. If the person you co-sign for does not pay, your credit score will be hit hard 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 and the addition of the car loan to your credit report can increase what's known as the credit score. Your credit mix makes up 10 percent part of your FICO credit score. Payment history: Just as your score may decrease when the primary borrower fails to pay on time It is also possible to gain in less of a scaleby having them make consistent on-time payments. In the end, acting as co-signer is an important financial decision and could cause financial or interpersonal headaches. For many, it is the difference between having a vehicle or not. If you choose to sign a co-signer agreement, protect yourself and be certain that you have the funds to pay for the loan in the event that the primary co-signer defaults. Find out 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 ways and pitfalls of borrowing money to purchase cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to manage their finances with clear, well-researched details that cut otherwise complicated topics into digestible pieces.
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