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2 min read published on October 12, 2022.
Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in helping readers in navigating the ways and pitfalls of borrowing money to purchase cars. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers to control their finances by providing clear, well-researched information that is broken down into complex subjects into digestible pieces. The Bankrate guarantee
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Therefore, this compensation may affect the way, location and in what order products are listed, except where prohibited by law. This is the case for our mortgage and home equity products, as well as other home loan products. Other factors, such as our own website rules and whether or not a product is available in your region or within your own personal credit score may also influence how and where products appear on this website. While we strive to provide an array of offers, Bankrate does not include details about every credit or financial item or product. The act of signing off as a cosigner is a way to make it possible to own a car for a friend or family member who isn’t eligible for financing without your assistance. But co-signing carries a risk — since you are both legally responsible for the loan late payments, or default will impact your financial situation. If the car owner is accountable, co-signing may help improve your credit. 5 ways to protect yourself as a co-signer Consider these tips to ensure your financial security should you choose to become co-signer in the future for a . 1. Serve as a co-signer only for close friends or relatives The main risk when being a loan co-signer can cause damage to your credit score. It is best to assist a friend or family member who you trust -one with a steady income that is stable financially. You must be sure that the primary borrower can pay but just didn’t qualify because of their lack of the financial background or their age. 2. Be sure that your name is on the title of the vehicle. Co-signers don’t hold ownership for the automobile. This means that the way you are named on the loan agreement is important. If you’re not listed on the title, you may not have a legal claim on the vehicle but would be on the hook for any future payments. Verify that the title lists you as the owner of the vehicle and not the primary one. The vehicle can’t sell without the two parties’ signatures. 3. You should draft a contract. While you both agree on the loan itself, having a separate contract detailing your expectations of the primary borrower is an additional layer of security and serve as a reminder of the agreement’s importance. The contract does not have to be too complex. Just a promissory note outlining the cost, obligations, and the consequences of default to both sides. After you and your partner have reached an agreement take the document to a notary in order to be signed. 4. Monitor monthly payments One method to be more confident about the ability of the borrower in making payments is to keep track of the monthly payment schedule. It can be as easy as setting a calendar reminder to check on their expenditure. While this might feel awkward, remember that your credit score is in danger. Reach out and start the conversation to keep track of the family member or friend without having to manage the loan. 5. Ensure you can afford payments In the event that all else fails you must ensure that you are able to cover the costs of the loan. If you are not able to repay the lender and your credit score is in trouble — and you may risk default and other legal actions. The principal borrower is responsible for the most responsibility, but you are ultimately on the hook for the loan as co-signer. How co-signing an auto loan affects your credit The risks of co-signing a car loan are simple though potentially serious. If the person you sign for isn’t able to pay, your credit will be hit hard and you’ll be on the responsibility of paying for the loan. There are also benefits to your credit score: Credit mix: Based on the current credit accounts, adding the car loan in your credit score can increase what’s known as your credit mix. The credit mix comprises 10% of the FICO credit score. Payment history: Just as your score may decrease if the primary borrower doesn’t make timely payments It is also possible to gain but on an insignificant scale- from them making consistent punctual payments. The bottom line : Being co-signer can be a major financial decision and could cause financial or interpersonal headaches. But for many, it can make the difference between owning a vehicle or not. If you decide to co-sign the loan take care to protect yourself and make certain that you have the funds to pay the loan in case the primary co-signer defaults. Learn more
The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the ins and outs of securely taking out loans to purchase an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to control their finances with concise, well-researched, and clear details that cut complex topics into manageable bites.
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