Most people have probably heard the term cosign and have a general idea about what it is about. Specifically, it means a person who cannot qualify for a car loan due to bad credit, or other factors, and needs to have someone vouch for them in order to get the loan.
In the simplest terms, the cosigner isn’t just signing their signature to the loan document; they are also promising to take over all the payments due in the event the buyer of the car defaults on the loan and is unable or won’t keep up on the payments.
So if your friend or relative asks you to cosign on the dotted line in order to buy a car, should you or shouldn’t you do it? Before you make the decision here are some more facts about what happens when you cosign for a car loan.
Yes, You Are ResponsibleCosigning sounds innocent enough. All you’re doing is helping someone who can’t get a loan to qualify for one. It’s a nice gesture and you are doing a good deed. But in this case, you’re not only doing a good deed, you are bound by the law to pay off the entire loan if your friend or relative can’t.
It also means that you’ll be liable for any and all late fees or collection fees accrued during the payment default time.
Not only that, if the primary borrower, your friend or relative, is late on just one payment, this is all it takes for you to be liable for the defaulted loan. And if you can’t pay off the loan or fees, the lender has the right to
sue you in order to garnish or dip into your earnings to pay off everything.
Your Credit Score Can Go DownWhile it may not be your fault that your friend or relative can’t make the payments or is late in making them on time, this bad track record can lower your personal credit rating and could stop you from getting other lines of credit in the future. This may mean being ineligible to take out a car loan for yourself, to secure a loan for a house, or to be approved for credit cards.
Figure Out If the Risk Is Worth ItIf Aunt Betsy or your BFF begs you to cosign for their car loan, admittedly, it can be a very hard situation to turn down. You don’t want to disappoint them, but there are some important considerations to take into account before you decide to cosign.
Be brutally honest and ask yourself if the primary borrower has the ability and capacity to make the payments, and make them on time. Does the person have a spotty track record for being dependable? Do they have a solid source of monthly income? Is the person honest and trustworthy?
If the answer is no to one or more of these questions, these should act as important warnings to you that cosigning is a big mistake.
If you do agree to cosign make certain that you can monitor the online statements to see if payments are being made and are on time. By doing this, you can take preventative measures to contact the lending agency to assure them that you are on top of the situation and not penalize your personal credit score.
But the bottom line is that cosigning is very risky with virtually no positives, and anyone who considers doing this must take serious precautions.
Source:
State Farm Insurance