There are RISKs in Cosigning a Car Loan

 

Man reviewing car loan documentation

I’ve seen cosigning deals go awry more often than not, so I typically counsel people not to get involved in them. The negative consequences of cosigning aren’t limited to short-term monetary problems, but can cause long-term relationship problems, too.

People need reliable transportation, but I would not categorize cosigning a car loan as a low-risk deal—just the opposite, in fact. If the lender thought the person needing the cosigner was a good risk, he/she would have gotten a loan without a cosigner. That should tell you a lot.

Car loans are typically five or more years long. There’s a lot of wear and tear on a car during that time, and the car will depreciate in value. The value of the car may not be enough to pay-off the loan at any given time. Consequently, you have to consider if you are willing and able to pay for any deficit if the person defaults on the loan. If the signor cannot or does not make the payments you, the cosigner, are obligated to make the payments. If events change in your life, would you still be able to make the loan payment?

When you cosign for a loan, this amount is counted in your debt ratio, as though you are making the payment yourself. This will affect your ability to borrow money to buy a home or a new car of your own.

What will you do if the person is unable to make the car payments for any reason, and he/she is afraid to tell you, as is normally the case? It’s possible that he/she could be 30 days late on the payment before you even find out, which will ding his/her credit—and yours. While the person might invite you to cosign on the loan, he/she probably won’t be as willing to let you tell him/her how he/she should spend his/her money so that he/she is able to make the car payment.

Given the risks of cosigning on a loan, I’d encourage you to help the person find different option. If he/she doesn’t currently qualify for a loan, the loan officer should be able to suggest what he/she can do to get a loan in the future. If he/she needs help, it may make more sense to help him/her do what it takes to qualify for a own loan, rather cosigning for him/her.

When he/she takes action in the right direction, it will build his/her confidence. He/She will learn a valuable lesson about borrowing only what you can afford to repay. People who purchase their own cars often take more pride in maintaining that car.

If a lender tells the person no unless they have a co-signer for a particular car and price, that doesn’t mean he/she has no other options. Help the person look at all his/her options and to make a decision that won’t put your finances—or your relationship—in peril.