3 things you should consider before co-signing for an auto loan
Co-signing an auto loan obligates you to repay the loan. This is the second post for our blog series on auto loans.
Young adults with limited or spotty credit histories often ask older family members, such as a parent or grandparent, to co-sign for a loan to help them buy a vehicle. However, co-signing for an auto loan includes real risks and responsibilities.
If you’ve been asked to co-sign a loan, you can use or share our new Take Control of Your Auto Loan resources. Our resources give you a roadmap to help you and the other borrower navigate and understand the total cost of your loan and other terms, and help you both repay the loan on schedule.
Here are three things to consider before you co-sign a loan to help someone else buy a vehicle:
1. Co-signers are responsible for repaying the loan
As a co-signer, you are not merely vouching for someone’s ability to repay a loan. Rather, as a co-signer, you are taking full responsibility to pay back the loan. If the other borrower stops paying the loan, you are responsible for making the monthly payments. If you are thinking about co-signing an auto loan, ask yourself whether you could make those monthly payments now and in the future.
If the other borrower defaults on the auto loan, the lender might repossess and sell the vehicle. Depending on your state law, the lender could then sue both of you for any outstanding loan balance. If the lender successfully sues you, the lender could try to garnish your bank account or wages or place a lien on your home.
2. Co-signing an auto loan could affect your credit
Your ability to borrow more money in the future may be affected by co-signing a loan. Lenders usually weigh the total amount of debt you’re carrying (including loans you co-signed) and your income before providing you with a new credit card, mortgage, or another auto loan.
Lenders usually consider your payment history too. Any missed payments on the auto loan that you co-sign also can make it harder to get new credit at a later time.
Before agreeing to co-sign, consider your current personal balance sheet and whether co-signing may affect your ability to get new credit in the future.
3. Co-signers can ask to receive monthly statements
Lenders sometimes send monthly statements only to the primary borrower. If you co-signed for an auto loan and don’t receive statements, ask the lender to start sending you monthly statements. If the lender agrees to send them, monthly statements will alert you about any missed payments.
If the loan is in default, the lender may try to repossess the vehicle. Many states provide consumer protections regarding how a lender repossesses and resells a vehicle after a loan default.
Our auto loan resources provide a roadmap to pay back the loan
We know that financing a vehicle, especially as a co-signer for someone else, can often be a challenging process for consumers. Remember, you’re on the hook like the other borrower. There are a few things you should consider before you become a co-signer. But before shopping for an auto loan, you can also play an active role by helping the primary borrower navigate and understand the auto loan process.
If you choose to co-sign a loan to help a family member buy a vehicle, we encourage you to share our Take Control of Your Auto Loan resources with your other borrower. Encourage the other borrower to use our new worksheet to help them get the best deal.