If someone you know has asked you to co-sign on an auto loan for them, it’s important to think it through before you agree, as this is a big decision you don’t want to take lightly. When you co-sign on a loan, it’s essentially as if you’re the one applying for the loan, and any issues the borrower has can have significant ramifications on your financial situation. Here are three of the most important things you need to know about co-signing on an auto loan.
1. The Lender Will Use Your Credit Score for the Loan
When you co-sign on an auto loan, the lender runs a hard credit check on you, and then uses your credit score to decide on whether to approve the loan and what the terms of the loan will be. That hard credit check can cause a small, temporary dip in your credit score.
Before you sign on the dotted line, you should consider why the borrower asked you to co-sign for them. The obvious reason is because their own credit score wasn’t good enough. For a young borrower, they may just haven’t had the time to build a credit history. But for anyone in their mid-20s or older, a bad credit score is a sign that they haven’t made responsible financial decisions.
Be careful about co-signing for anyone who hasn’t been demonstrated responsible financial habits in the past. It’s one thing to co-sign for a young relative who is just starting out in life and needs a form of transportation. It’s much riskier to co-sign for someone who has a track record of poor decision-making. You shouldn’t put your own credit on the line because someone else acted irresponsibly.
2. You Have the Same Responsibilities as the Borrower
The most important thing to realize when it comes to co-signing on an auto loan is that you’re just as responsible for the loan as the borrower is, and if they fail to make their payments, you’ll suffer the same repercussions as them. In fact, you have more to lose and less to gain.
If the borrower makes their payments, it will have a positive effect on both your credit scores, but yours will see less of an increase because it was good already. If the borrower doesn’t make their payments, their already-bad credit score may go down a bit, but your good score will suffer much more. And if the borrower defaults, you could be held liable for the remainder of the debt.
Remember that any negatives on your credit report can stick around for years. By co-signing on a loan, you could end up with a lower score and a debt that you need to pay for, without having any vehicle to show for it.
3. Once You Co-Sign, You’re There to Stay
You need to be 100-percent sure before you co-sign on a loan, because getting yourself taken off the loan will be very difficult, if not impossible. The only way you may be able to do it is if the borrower consistently makes their payments on time, and this would likely need to be for over one year.
It’s doubtful that a lender would allow you to get off the loan within the first few months. After all, the lender issued the loan on the strength of your credit, and you’re essentially their form of security on the loan. If the borrower defaults, they need someone to go after.
The only other option to get off the loan would be for the borrower to improve their credit score and apply for a new loan, and then use that new loan to pay off the old one. But your borrower may not want to do that.
Co-signing on an auto loan is one of the riskier financial decisions you can make, and it doesn’t benefit you at all, besides allowing you to help someone out with buying a car. Be very careful about who you co-sign for and find out why they need your help. When in doubt, it’s better to err on the side of caution and say no.