Key Takeaways
By agreeing to be a cosigner, you can help a friend or family member get a car loan who might not be able to get one without your help. But co-signing a loan is risky because you are both legally responsible for the loan. If payments aren't made, or the loan goes into default, it will hurt your finances. But if the person who owns the car is responsible, you could improve your credit score by co-signing. Here are some ways to keep yourself safe when you co-sign an auto loan
A big risk of being a cosigner on loan is that it could hurt your credit score. If possible, you should only help someone you trust, like a friend or family member who has a steady income and is financially stable. You need to be sure that the main borrower will be able to pay but didn't get the loan because of their age or lack of financial history.
The person who co-signs the loan does not own the car. This means that it matters how your name is written on the loan agreement. If your name is not mentioned on the title, you may not have a legal right to the car, but you would still be responsible for any payments. Make sure that the title lists both you and the main owner. This way, the car can't be sold without the signatures of both parties.
Lenders have strict rules about how they lend money, so use those rules as a guide. You can ask to look at the borrower's credit report and review their job and budget to make sure they can pay the bills. Knowing the person borrowing money is financially stable can make you feel safe.
Once you have the credit card or loan contract application, you should read it together. It is important to know what you're getting into. It is necessary for you both to understand the terms and conditions. Get an idea about the consequences if the borrower fails to make the payment. This should make it easy for the person in charge of the account to understand what needs to be done to keep it in good standing.
For more security, you might want to be the main owner of the account instead of the secondary owner. You'll get the bills, and you can get the money from the secondary borrower so you can pay the bill with confidence.
Ask for collateral. If you help someone buy a car, you can ask for an extra set of keys and agree that if payments aren't made on time, you can take the car and sell it to pay off the debt or take over the loan payments. Or, if you are a cosigner on a credit card, ask to keep another valuable item. You both agree that if they run up a big balance, you can sell it and use the money to pay off their debt.
Even though you and the primary borrower will both sign the loan, having a separate contract that spells out your expectations for the primary borrower can be an extra layer of protection. And a reminder of how serious the agreement is. This contract doesn't need to be very hard to comprehend. Just a promissory note that lists the costs, responsibilities, and what will happen if neither party pays. After you agree, take the document to a notary to make it official.
Keeping track of the monthly payment schedule is one way to ensure that the main borrower can pay. This could be as easy as putting a reminder in their calendar to check how much money they are spending. Even though this might feel weird, keep in mind that your credit is at stake. Just reach out and start talking to your friend or family member to see how they are doing without taking over the loan.
If nothing else works, you must know that you can repay the loan. If you can't pay back the lender, it will hurt your credit score, and you could end up in default or face other legal action. The main borrower has most of the responsibility, but as a cosigner, you are also on the hook for the loan.
Set up alerts with the lender to let you know when the payment is due and when it has been posted. It will help you keep track of the account you co-signed for and lets you know if it needs your attention.
Every few months, get together with the other owner to discuss how the account is going. This way, you can figure out if the other person is paying on time, which can help you avoid problems in the future. You should resist the urge to micromanage because it can cause a rift. So, convey your needs accordingly.
Depending on your debt, you might want to buy life insurance for the main account holder. Yes, you don't want to think about it, especially if you already co-signed on a loan with someone you care about, but things do happen. When you co-sign for a loan for a large amount, you should ask yourself how badly your finances would be hurt if the main account holder died and you had to pay off the loan.
If the loan is big, you might also want to set up a trust to protect your savings and property. Suppose someone takes on a new possible debt liability for themselves or as a co-signer. In that case, they should look over their estate plan to ensure that their assets are protected from future creditor demands. Talk to a financial planner to determine what is best for your situation.
A person who needs money should be able to get started with a joint financial arrangement. Twelve months is a good amount of time to improve one's credit score so that one can refinance an existing loan or apply for a new credit card. Then, ask the current issuer if they can take you off any old accounts where you are a joint owner. If they can't, you might want to cancel it. Your credit scores might go down a little, but breaking free might be worth it.
If the borrower doesn't pay, your credit score could take a big hit and the loan will be your responsibility.
Adding a car loan to your credit report could help your credit mix, depending on how many other credit accounts you already have. 10% of your FICO credit score is based on the types of credit you have.
Just as your score could go down if the primary borrower doesn't pay on time, it could go up if they consistently pay on time. However, this effect is much smaller.
Being a cosigner on a loan is a big financial decision that could lead to problems with other people or with money. But for many people, it's the difference between having a car and not having one. So, if you decide to co-sign a loan, you should protect yourself and make sure you can pay back the loan if the main borrower doesn't.
When you co-sign for someone, you agree to be responsible for the loan, lease, or other agreement if the original borrower can't pay as promised. Whatever you co-sign will show up on your credit report as if it were your loan. Depending on your credit history, this could affect your credit scores.
A cosigner has no legal rights to the car, so they can't take it away from the person who is supposed to own it, the primary borrower. But if the title lists both you and the main owner, the car can't be sold without the signatures of both parties.
You must first talk to your lender to get your cosigner off the loan. After getting in touch with them, you can ask for the release if the lender will let you. This is just paperwork that removes the cosigner from the loan and makes the main borrower the only borrower on the loan.
Being a cosigner doesn't give you any rights to the property, car, or other security the loan pays for. It just means that you agree to be responsible for paying back the loan amount. So, make sure you can pay this debt if the borrower can't. You may face collections, but if the lender allows, you can't get yourself removed as a cosigner.