Someone you're close with is in a jam – they need a car loan, but the lender says it's a no go without a cosigner, so they come to you for help. Do you say yes in this situation?
There's no right or wrong answer, but there are a few things to consider before you sign on the dotted line on someone else’s auto loan. Let's look at what you should know before committing to being a cosigner for a friend or family member.
What it Means to Be a Cosigner
If you're asked to cosign on a loan, it means that the primary borrower is using your good credit to get approved and you have to promise to repay the loan if they can't, as a guarantee for the lender. Lenders sometimes require cosigners for borrowers with poor credit, but there's no exact rule that states when one is needed – it varies by lender.
As a cosigner, you typically have to meet the same requirements and qualifications as the primary borrower. This is because you're agreeing to take over payments if the borrower falls behind, or simply doesn't pay.
Things to Understand as a Cosigner
Deciding to cosign on an auto loan takes serious consideration. You have to make sure that you're prepared for anything that might happen with this car loan – even though the vehicle isn’t yours, you’re responsible for the loan in the eyes of lenders.
Here are some important points to consider if you're thinking about cosigning on an auto loan:
- No ownership rights. Even though you agree to make payments on the loan should the primary borrower be unable to, you have no legal rights to the car. Even if you pay off the entire loan, the vehicle still belongs to the primary borrower, not you.
- You can be sued. When you cosign for someone, you need to understand that the lender can come after you for any missed payments or even the total loan amount, for any reason (including death of the original borrower), and they can bring legal action against to make sure you pay.
- Harder to qualify for loans. Because you're listed as a cosigner, this may affect your ability to qualify for a loan of your own in the future, even though you're not making payments. Lenders can see the loan listed on your credit reports and include the payment into any debt to income calculations, which affects your available income.
- Your credit is tied to the loan. Your ability to pay for a loan in the future may not be the only thing affected. If the primary borrower stops making payments, or continually pays late, your credit score drops right along with theirs.
- Cosigning is long term. Once you're listed as a cosigner, it's difficult to remove yourself from the loan. For the easiest way out, the primary borrower's credit has to have improved enough for them to refinance the vehicle on their own.
Since cosigning for a car is such a large responsibility, it's important that you and the primary borrower discuss all the details ahead of time. Just because there can be major consequences doesn't mean there will be – it just requires caution before making a decision.
Should You Cosign?
Whether or not you should help out someone who asks you to cosign is something only you can answer. If you don't think cosigning is right for you, but you still want to help, consider less long-term options that may still be helpful – such as helping out with their down payment. In some cases, a larger down payment may replace the need for a cosigner.
Another option you might have is to make sure the primary borrower is getting the right kind of auto loan for their credit situation. Not all lenders work with people who have credit challenges, but sometimes traditional lenders work with people they may be on the fence with if they can provide a significant down payment and a cosigner. If this is the case, they may be working with the wrong lender.
Instead, talk to them about teaming up with The Car Connection. We work with dealerships all across the country that have lenders available to work with bad credit, no credit, and even bankruptcy. Borrowers can search for vehicles with our new and used car buying guides, and when their ready, they can simply fill out our easy online auto loan request form, and we'll get right to work matching them with a local dealer.