Co-signing an auto loan may allow you to help a friend or family member get a car. Where this can be a kind and wonderful gesture, there are some things you may want to know before going into the deal. This article will point out some helpful tips so that you can reserve your relationship with the person you are co-signing for.
What is a co-signer?
A co-signer is someone who signs the loan papers along with the car owner and asserts the responsibility of the loan should the owner default.
Co-signing an auto loan can be a great help to someone with less than perfect credit and help them obtain an auto loan. Another reason to co-sign an auto loan may be to help someone that has not had the chance to develop a credit history, maybe a son or daughter.
With assuming the responsibility of the loan, the auto loan will appear on the co-signers credit report. This loan will affect the co-signers credit in the event the person they are signing for does not make the payments. Knowing this can help you make a wise choice about co-signing for an auto loan or not.
What is required of a co-signer?
Co-signers should have an excellent credit score to be considered as a co-signer. In addition, your income to debt ratio will be considered. The lender is going to want to be sure that you will be able to make the monthly payments should the auto owner default.
Legally, the co-signer is accepting full responsibility of the auto loan. All late payments will show on their credit report, which could damage their credit score should the owner fall behind on payments.
Also, with this loan appearing on their credit report, it may prevent them from getting any other loan should they need one in the future. A potential lender may consider the co-signer high risk because of the additional loan, even if the owner is making the payments in a faithful manner.
Things to consider before co-signing an auto loan.
Sit down and look over the person's finances with them. Make sure that this person has enough income to make the car payments and can afford the car. Consider all the person's financial responsibilities and make sure the person you will be co-signing for is not over-extending themselves.
Know their payment history. If they have borrowed money from someone in the past, did they pay it back in a timely manner? Is the person financially responsible?
Ways to protect yourself.
Ask the lender to include you in all correspondence. This way, you will have first-hand knowledge should the owner begin falling behind on the payments. This way you can make the payments if you need to in order to protect your credit.
Obtain on-line access to the auto loan. You will want to be able to monitor the payments frequently and can keep yourself abreast of any issues before they arise, again protecting your own credit history.
Helping a friend or family member get a car by co-signing an auto loan can be a loving gesture, however it is a business transaction and you do want to protect yourself.