Co-Signing a Car Loan

Co-signing for a car loan happens quite often. Unless they can walk to work or school, most Akron-area residents need a vehicle to commute to work. Owning a car gives you freedom, but unfortunately, getting a car loan with less than perfect credit can be challenging. Some people may still need a co-signer to get over the financing line. Maybe you’ve had to ask a friend or relative to co-sign a loan for you, or perhaps someone has asked you to co-sign for them. Either way, there are a few things to consider before entering into this type of agreement.

What Is Co-signing?

“Poor Credit Key” licensed under CC BY-SA 2.0 via Flickr by CreditDebitPro

Having someone co-sign a loan allows a person with poor credit to secure a loan they otherwise couldn’t get on their own. A co-signer agrees to take responsibility should the primary borrower fail to repay the loan. That said, co-signing a loan isn’t the same as co-buying nor as simple as providing a character reference. Co-signers must assume the risk of the primary borrower failing to repay the loan without the benefits of ownership. Co-signers don’t get to use the car or receive any monetary gain should the vehicle be sold.

In addition, the co-signer risks damaging their credit score should the primary borrower fail to pay. The lender has the legal right to come after the co-signer for late payments, fees, or even repossession costs. The risks co-signing entails are so real and scary that experts recommend you only co-sign for someone you trust and hope they’re reliable enough to live up to the agreement.

Who Benefits From Co-signing?

The person with poor credit or no credit history benefits the most. That individual can secure an auto loan with a co-signer and gets a car. Getting auto financing also lets them build good credit, provided they make the payments on time.

Parents are most often asked to co-sign for a car loan by their children. The chance to co-sign provides you as a parent an opportunity to teach good financial habits to your child. Also, securing an auto loan helps your child establish a credit history, which will help them down the road. When the primary borrower repays the loan on time, the co-signer’s credit improves as well.

Things To Consider Before Co-signing

It would be best if you asked to see a credit report from anyone who requests you co-sign on a car loan. People generally don’t like to share their finances, especially when they have poor credit, but you should insist. Looking at their credit report will give you a better understanding of their fiscal responsibility and help you decide if you should co-sign or not.

Another consideration would be your finances. If you want to apply for a mortgage or refinance in the near future, co-signing a car loan can impact your debt-to-income ratio. This metric has a significant bearing on a lender’s decision. Even if the primary borrower makes all the payments on time, you still carry that debt on your credit report until the loan gets paid.

It would help if you were sure that given your financial situation, you can afford to make the loan payments should the primary borrower default on the loan. Overlooking this can be catastrophic to your finances. Bad things happen, even to the most well-intentioned people. Unforeseen injuries or medical conditions can prevent the primary borrower from working, or they could get laid off. Through no real fault of their own, the primary borrower might not be able to make the payments, and if you can’t afford them either, your credit will suffer.

Finally, be sure you have a strong relationship with the primary borrower. Co-signing a loan can stress a relationship, even with family members. The drama that ensues can damage these relationships. To help you prevent such an unfortunate development, financial professionals recommend you talk about the ramifications before you co-sign for a car loan. The discussion should cover the steps you both take to satisfy the loan.

These steps may include interim payments by you until the primary borrower can resume payments. You should also develop a plan to sell the vehicle if necessary to avoid the extra drain on your finances. If the primary borrower no longer has a job or is dealing with medical conditions, they may not need the car. You can always co-sign another loan in the future when the primary borrower’s situation improves.

How To Protect Yourself When Co-signing

Some co-signer loans come with the stipulation that the co-signer’s name is removed from the contract after a certain number of on-time payments have been made. You won’t commonly find this addendum, but asking the lender to include it doesn’t hurt. However, in most cases, you’ll be on the loan documents until the loan gets paid off.

After a certain number of on-time payments are made, the primary borrower’s credit score should improve, possibly to the point where they can get a loan on their own. In this case, you can refinance the car loan using only the primary borrower’s credit.

Before you co-sign, ask the lender to provide you access to the loan account. In addition, you should request alerts when payments are made and missed. This oversight will allow you to intervene quickly and limit any potential damage to your credit.

Some financial experts also suggest signing an agreement that requires the primary borrower to sell the car and pay off the loan if they fall behind on payments. While the legal force of such an agreement might be questionable, at least the primary borrower understands you’re serious about them making the payments promptly.

You should always get preapproved for a car loan before you begin shopping for a car. Getting preapproved will help the primary borrower and co-signer understand exactly what they can afford. It also allows you to shop for better rates and negotiate terms.

At North Coast Mitsubishi of Akron, we understand the importance of owning a car. We also believe everyone has the right to own a vehicle. That’s why our finance department offers various loan programs for those with poor credit or no credit history. Our finance managers will work to find the perfect loan, even for those with subprime credit. Of course, if you still need a co-signer, our team can construct a loan that works for the primary and co-signer alike. We encourage you to contact us with any questions you might have about co-signing.