Things to Consider Before You Co-Sign an Auto Loan

A co-signer is someone who agrees to take on the responsibility of paying the loan if the original borrower is unable to pay.

They are legally responsible for the loan and will have their credit affected, wages garnished, and possibly sued if the loan is not paid off.

Co-signing a loan is a huge responsibility so you need to be aware of the consequences.

Never Co-Sign if Borrower Has Bad Credit

A co-signer should only be used in cases where the borrower has a lack of credit history, never if they have bad credit.

There's a reason why their credit is bad - they failed to pay their bills on time. If a lender thinks they're too risky to borrow money - even at high interest rates, then you need to think twice about taking on the responsibility for the loan.

Co-signer's Credit Will be Affected

Many don't realize that co-signing someone else's loan will affect their own credit.

A co-signer is treated exactly the same as the borrower, which means new debt will be added to their credit profile and their debt to income ratio will increase.

These are factors that negatively affect credit scores, so be aware of this and don't co-sign a loan if you need to get a loan in the near future.

Many co-signers end up in a situation where they can't finance a vehicle for themselves because they have taken on too much debt.

Make Sure You Can Afford the Payments

There are a lot of unexpected things that can happen after signing a car loan. People lose jobs, become sick or disabled, and there's always a risk of them dying or simply being irresponsible and not paying their bills.

When you co-sign a loan, you better be prepared and able to pay off that loan.

Ways to Protect Yourself

Co-signing on a loan is legally the same as taking out a loan in your name.

You should do everything possible to minimize the damages in the event the borrower can't pay off the loan.

One thing you can do is ask the lender to agree in writing that you will be responsible only for the principal balance on the loan. You want to be protected against legal fees if the lender decides to sue.

Also ask the lender to be notified if the borrower is late with a payment. You want to prevent any late payments from showing up in your credit report so you should try to rectify the situation before it's reported to the credit bureaus.

Finally, you should only co-sign if you fully trust the borrower. It makes sense if you're co-signing for your child who has no credit history, but it's foolish to do so for a friend who just can't pay their bills on time.