Adding a co-signor to a car loan makes it easier for someone with little or no credit history, or even poor credit history, to get a new vehicle. Co-signors are usually family or friends of the borrower, but can be anyone willing to make the commitment. Just be aware that as a co-signer, you are legally obligated to pay the loan if the main borrower can't.
Benefits of Cosigning
Most of the benefits of co-signing a loan lie with the person you're co-signing for. First off, co-signing allows the borrower to obtain approval for loans he could not access on his own. This helps a young person build credit or someone with bad credit get back on track. Some lenders will also offer lower interest rates if the co-signer has good credit. In addition, having a co-signer on the loan might prevent an auto dealer from taking advantage of a naive first-time car buyer by putting very high interest rates on the loan.
As a co-signer, you must fill out a loan application and provide the requested personal and financial information to the lender just as you would if you were the primary loan applicant. Most lenders will ask for copies of your pay stubs or a recent tax return to prove your income. If you have agreed to pay part of the down payment, you may be asked to provide the funds upon approval of the loan.
During the loan application process, you will typically be asked to submit to a credit check. If the primary borrower has extremely bad credit, you may need better credit than if you were taking out your own loan because the borrower poses such a great risk to the lender. In most cases, your chances of being approved will increase the longer you have stayed at your current job and residence, particularly if you are a home owner. A stable work and residential history shows lenders that you have been able to fulfill your responsibilities in the past.
Risks to the Co-Signor
The main financial risk of co-signing a loan is that you will have to take over the payments if the borrower defaults. You may not receive proper notice of missed payments until it is too late and the loan is already in default. Not only are you on the hook for the loan, your credit score will also take a hit. In addition, co-signing on a car loan also exposes you to liability for insurance claims if you hold title jointly with the borrower. Co-signing for too many loans can make it more difficult for you to obtain your own financing. Finally, if the lender chooses to write off any part of the debt, you may be required to pay taxes on the forgiven amount.
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