Content of the material
- Cosigning a car loan: pros and cons
- Questions to consider before signing off as a co-signer
- Can your relationship survive a financial burden?
- Are you able to keep track of the monthly payments?
- Can you afford to pay off the loan if needed?
- Do you want to agree to a long-term financial burden?
- Is a Cosigner Always an Option?
- How to list a co-owner on your bankruptcy forms
- You have to disclose the fact that another person owns the vehicle with you on your Schedule A/B:
- How does cosigning for a car work?
- Risks of cosigning
- How Cosigning a Car Loan Affects Your Credit
- Debt-to-income ratio
- An Unusual Time When Co-Signing Can Be Good for Everyone
- Can a co-signer pay my car insurance?
- Things To Consider Before Co-signing
- Read More
Cosigning a car loan: pros and cons
You should always consider the positives and negatives of cosigning before asking someone to help when you apply for an auto loan.
| Helps you buy a car when you can’t qualify for financing on your own |
Gives you the opportunity to start establishing credit or rebuilding your credit as you make on-time payments on your loan
You may qualify for a lower interest rate, which could save you money on your monthly repayments
| Possible damage to your cosigner’s credit if you miss loan payments |
The cosigner may have to pay late fees and collection costs and may face legal action if the loan is unpaid, including being sued and having their wages garnished
Potential damage to your relationship with a loved one if you fail to repay the loan
Questions to consider before signing off as a co-signer
If you want to agree to the responsibilities of being a co-signer, consider these factors first.
Can your relationship survive a financial burden?
Before agreeing to be a co-signer on a friend or family member’s loan determine if your relationship can handle a shared financial burden. Conversations about money can put a strain on a relationship in any case but when legal responsibilities are added into the mix it can turn even messier.
Are you able to keep track of the monthly payments?
As a co-signer, you will feel inclined to check in on the monthly payments to ensure that you will not have to pay the entirety of the loan. This might result in some uncomfortable conversations. Keep in mind that lenders do not have to inform you if payments are late or missed so you will likely feel added stress to check in given your credit is on the line too.
Can you afford to pay off the loan if needed?
Worst case scenario as a co-signer means having to pay off the loan on your own if the primary borrower does not. Before agreeing to take responsibility for the loan be sure that the amount is a number that realistically can fit in your budget. Otherwise, you could be placing yourself in a potentially risky financial situation.
Do you want to agree to a long-term financial burden?
Loans are not usually short-term, and when it comes to auto, they can last up to 84 months. As a co-signer you will be signing off to a long-term financially bound relationship. And although it is possible to leave a co-signed loan it is a complicated process, so determine if you are willing to commit to this agreement before agreeing.
Is a Cosigner Always an Option?
Not all lenders will give you the option of having a cosigner, but many offer it as a way to make financing viable for more borrowers. You can be denied a loan for a number of reasons, including your credit score and history, as well as your income and other factors.
If you’re fresh out of college and just started your first job, your salary may be relatively low, especially when lenders factor in any other debts (including student loans) you might be carrying. A cosigner can help you meet approval requirements and not only buy a car, but build your own credit history as well.
If you think you’ll need someone to cosign a loan with you, it’s wise to call around to a few dealerships, banks and auto lenders to find out if they allow cosigners. That way, you can focus your search and loan application processes on lenders you know will work with you and your cosigner.
How to list a co-owner on your bankruptcy forms
You have to disclose the fact that another person owns the vehicle with you on your Schedule A/B:
If the car is paid off, that’s the only part of your forms where you list that you have a co-owner.
How does cosigning for a car work?
“There’s sometimes a misconception in thinking that cosigning is as simple as a character reference,” said Ohman, but it’s not just about vouching for your ability to repay the loan.
Instead, the cosigner is lending you their good credit history and taking equal responsibility for the auto loan contract.
Both parties will have to submit similar information to the lender, and the cosigner will likely be subject to a credit check, too. The documents and information you’ll need to present can vary by lender, but they generally include the following:
- Driver’s license
- Proof of income
- Verification of address
- Social Security number
Risks of cosigning
As the primary borrower, you’re required to make loan payments, but the cosigner is on the hook if you stop paying. As we’ve noted, the cosigner could be subject to late fees or collection costs, including being sued, if you fail to make payments. They can also be required to pay back the loan if you file bankruptcy or die.
Lenders may also include the loan in your cosigner’s DTI ratio, which calculates your monthly debt payments and divides them by your gross monthly income. If it pushes your cosigner’s DTI over 36%, this could result in a lender denying the cosigner’s future loan applications.
Both parties also face credit liability. Information about the loan will appear on your credit reports, as well as the cosigner’s reports. If a payment for the loan is missed, it will affect both of your credit scores negatively and appear on each of your credit reports for seven years.
Another factor for both parties to consider is insurance liability. Requirements vary by state and lender, but the cosigner likely won’t need to have their name on the insurance policy unless they elect to add their name to the title. Ohman recommends, however, that even if a cosigner’s name isn’t on the policy, they should check to make sure the owner has at least the minimum coverage required by the lender and the state.
While it’s not a formal responsibility, both of you should consider the long-term commitment you’re making to each other. If you as the primary borrower take on a loan with a six-year repayment term, any bad decisions you make during that period could negatively impact your cosigner.
How Cosigning a Car Loan Affects Your Credit
Cosigning has a significant impact on your credit report. The loan will show up on your credit report as if you were the one who just bought a car.
“When you cosign a loan, it’s your loan,” said mortgage expert Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.” “You are entirely responsible for it.”
The loan payments will be counted as part of your debt-to-income (DTI) ratio which is your monthly debt payments divided by your monthly gross income. If you’re applying for a mortgage, most lenders require that the total DTI, including any future mortgage payments, is 43% or less.
Let’s say you have a $500 monthly student loan payment, and your monthly gross income is $2,500 a month. This means your DTI ratio is 20%. If your boyfriend asks you to cosign on an auto loan with a $600 monthly payment, then your new DTI will be 44%. This could disqualify you from being approved for a mortgage.
An Unusual Time When Co-Signing Can Be Good for Everyone
If you have no credit score and a financially-able close relative, you both may benefit from a co-signing arrangement.
In a case described by one of the major U.S. credit reporting bureaus, a lucky person with no credit—not bad credit—was able to find an auto loan for 0% interest. The loan was made in the relative’s name and with her as a co-signatory. In this example, the lucky person was able to start building a credit score because of the help of the trusted relative. If you find yourself in a similar situation, it might be worth discussing such a plan with relatives rather than despairing at the prospect of not being able to take out a loan at all.
Co-signing a loan is fraught with risk and can cause a lot of stress. If all goes well, however, it could also be a positive experience that strengthens personal bonds. Just be sure that you fully understand the potential pitfalls before you agree to co-sign. And remember, if you are not completely comfortable with the arrangement, don’t be afraid to say “No.” You may end up saving an important relationship.
Can a co-signer pay my car insurance?
Yes. You can always split the cost of a policy with your co-signer or have them pay your premium, if they’re willing to. If you’re unable to make the payments, you can also speak with your insurance provider about payment plans or financial assistance.
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.
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