Auto Loan Cosignment: Is Being a Co-Signer All Risk and No Reward?

We all may have experienced a situation where a friend or family member asks you to become a co-signer. Before saying yes, it’s best to know what you’re getting into. Typically, when you consider co-signing an auto loan, you agree to repay the loan amount if the primary borrower stops making payments. As long as you agree, the risks outweigh the benefits. You may think of it as a way to improve your credit score, but don’t delve into it before fully understanding the risks associated with it.

Risks Associated With Co-signing an Auto Loan

1) Bad credit score

Getting a good credit score takes a decent effort. When it becomes collateral, any form of auto loan late or non-payment will show up on your credit report. The principal borrower’s inability to make payments can lower his credit score. Also, your debt-to-income ratio increases when it becomes collateral. Ideally, the debt-to-income ratio should not be more than 36 percent. Being a co-signer increases your debt relative to your income. And your credit score goes down due to the increase in the amount of debt. Therefore, if the borrower has a poor credit history, reconsider your decision.

2) Executable legal sentences

When the primary borrower is unable to repay the loan, the lender can take legal action against the cosigner. In addition, there is a high probability that you will be sued before the main borrower. This is because you are likely to pay off the loan amount quickly to protect your credit score. In the event that the primary borrower is unable to repay the loan, the co-signer’s assets and salary may be in jeopardy as the lender can reclaim his assets.

3) Reduced creditworthiness

When you are a co-signer, other lenders see you as someone who has already agreed to guarantee a loan. Lenders assume that you are already making monthly payments on the jointly signed loan, leaving little money to make payments on a new loan. Therefore, getting approval for a new car loan may be difficult for you.

Does it make sense to become a Co-signer?

While it may not be a financially sound decision to become a co-signer, you can accept it when you are in a position to take the risk. If you have a good amount of surplus cash or have substantial assets to pay off the principal borrower’s loan amount, you can think about it. Also, if you are going to use the car, it makes sense to say yes.

Co-signing an auto loan can seem like a lucrative way to improve your credit score. However, it can mean all risks and no rewards when you have to deal with a damaged credit rating, enforceable legal judgments, and reduced creditworthiness.