We may all have experienced a situation where a friend or family member asks you to be a co-signer. Before you say yes, it’s best to know what you’re getting into. If you are considering Cosigning a Car Loan, you usually agree to repay the loan amount if the main borrower stops making payments. While you agree, the risks outweigh the benefits. You can think of this as a way to improve your creditworthiness, but you can’t go into it until you fully understand the risks involved.
Risks associated with Cosigning a car loan
1) Damaged credit score
Achieving good credit requires reasonable effort. If you become a co-signer, any form of delay or non-payment of the car loan will affect your credit report. The main borrower’s inability to make the payments can reduce your creditworthiness. Your debt-to-income ratio also increases when you become a co-signer. Ideally, the debt to income ratio should not exceed 36 percent. As a co-signer, you increase your debt over your income. And your credit score drops because of the increased debt. Therefore, if the borrower has bad credit, reconsider your decision.
2) Enforceable legal judgments
If the main borrower cannot repay the loan, the lender can take legal action against the co-signer. There is also a high probability that you will be sued before the main borrower. This is because you are likely to repay the loan amount quickly to protect your credit rating. If the main borrower is unable to repay the loan, the assets and salary of a co-signer may be compromised as the lender can claim his or her assets.
3) Reduced creditworthiness
If you are a co-signer, other lenders will see you as someone who has already agreed to guarantee a loan. Lenders assume that you are already making monthly payments for the loan you signed for, leaving little money to make payments for a new loan. Therefore, a new approval for auto loans could be difficult for you.
Does it make sense to Cosigning a Car Loan?
While it may not be a financially sound decision to become a co-signer, you can agree if you are able to take the risk. If you have a good amount of excess cash or have substantial assets to repay the loan amount of the main borrower, you can think about it. If you are using the car, it is also a good idea to say yes.
Taking a car loan can look like a lucrative way to improve your credit rating. However, it can mean any risk and no reward if you have to deal with damaged creditworthiness, enforceable legal judgments and reduced creditworthiness.
For further information you may also like the article Getting A Car Loan Five Things to Know About