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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 goal is to help you make better financial choices by offering you interactive financial calculators and tools that provide objective and unique content, by enabling users to conduct research and compare information for free to help you 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 Make Money The offers that appear on this site are from companies that compensate us. This compensation may impact how and when products are listed on the site, such as such things as the order in which they appear within the listing categories in the event that they are not permitted by law. This applies to our loan products, such as mortgages and home equity, and other home lending products. However, this compensation will have no impact on the information we provide, or the reviews appear on this website. We do not cover the vast array of companies or financial deals that might be available to you. Oliver Rossi/Getty Images
2 min read published 12 October 2022
Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the details of taking out loans to purchase an automobile. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing precise, well-researched and well-informed information that breaks down otherwise complex subjects into digestible pieces. The Bankrate promise
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This compensation could affect the way, location and in what order items appear in listing categories, except where prohibited by law for our mortgage, home equity and other home loan products. Other factors, such as our own website rules and whether or not a product is available within your region or within your personal credit score may also influence the manner in which products appear on this site. Although we try to offer a wide range offers, Bankrate does not include specific information on every financial or credit product or service. Co-signing as a customer could allow the vehicle to be owned for a friend or family member who might not be eligible for financing without your help. But co-signing carries a risks, as you are both legally responsible for the loan, missed payments or default will impact your financial situation. If the car owner is accountable, co-signing can increase your credit score. Five ways to safeguard yourself as a co-signer Consider these points to protect your financial security should you choose to become co-signer in the future for a . 1. Serve as a co-signer only for close friends and family members The biggest risk when being a loan co-signer is potential damage to your credit score. In general, you should aid a family member or friend member you trust- someone with a consistent income that is stable financially. You must be sure that the primary borrower can pay but just didn’t qualify because of their lack of financial history or age. 2. Make sure your name is on the title of the vehicle. Co-signers don’t hold ownership of the vehicle. This means the way you are named to the loan agreement is crucial. If you’re not listed to the title of the vehicle, 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 the primary owner and yourself. So, the car can’t be transferred without two parties having their signatures. 3. You should draft a contract. While you both agree on the loan in its entirety, having a separate contract stating your expectations of the primary borrower is an additional layer of security and serves as an indicator of the contract’s seriousness. This contract doesn’t have to be too complex. It’s just a promissory note that outlines the obligations, costs and what default means each party. Once you have both agreed, bring the document to a notary in order to be signed. 4. Make sure you track monthly payments. One method to increase confidence in the primary borrower’s ability of paying is to keep track of the schedule of monthly payments. It can be as easy as setting up a reminder on a calendar to check on the amount they spend. While this might feel awkward however, keep in mind that your credit score is at risk. Just reach out and open the conversation to keep track of your friend or family member without supervising the loan. 5. Be sure to have the funds for payments. In the event that all else fails it is essential to ensure that you will be able to pay the payments on the loan. If you’re not able to pay back the lender then your credit score will be in danger as you could risk default and other legal actions. The primary borrower has the majority of the responsibility, but you are ultimately on the hook for 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 aren’t difficult but could be serious. If the person who you co-sign for doesn’t pay, your may be in for a major loss and you’ll be on responsible for the loan. There are also positive effects to your credit score Credit mix: Depending on your current open credit accounts, adding the car loan on your credit file can enhance what’s called the credit score. The credit mix comprises 10% of the FICO credit score. History of payments: Just as your score may decrease if the primary borrower doesn’t make timely payments, it’s possible to benefit but on less of a scale- from them making consistent on-time payments. The bottom line Acting as a co-signer is a big financial choice that could lead to interpersonal or financial difficulties. However, for many, it can make the difference between owning a vehicle or not. So if you decide to co-sign the loan, protect yourself and be certain you are able to pay for the loan in the event that the principal borrower fails to pay. Find out more
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ways and pitfalls of borrowing money to buy a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances with precise, well-researched and well-sourced information that breaks down otherwise complicated topics into digestible pieces.
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