Auto Loan Co-Signature: What Are the Risks and Benefits of Cosigning?
There may have been times when a friend or family member asked you to cosign for them. It’s best to understand what you’re agreeing to before you say yes. You typically agree to pay back the loan balance if the primary borrower defaults on payments when you consider cosigning for an auto loan. The risks outweigh the advantages even though you agree to it. You might think about it as a way to raise your credit score, but don’t get too involved until you fully comprehend the risks involved.
Risks associated with Cosigning an Auto Loan
1) Damaged Credit Score
It takes work to build a strong credit rating. Any kind of delay or non-payment of the auto loan will appear on your credit report once you sign on as a cosigner. Your credit score may suffer if the primary borrower is unable to make the payments. Additionally, when you add a cosigner, your debt-to-income ratio rises. A debt-to-income ratio should ideally not exceed 36%. Your debt relative to your income rises if you cosign. And as your debt load grows, so does your credit score. You should reconsider your choice if the borrower has a bad credit history.
2) Enforceable Legal Judgments
The lender may file a lawsuit against the cosigner if the primary borrower is unable to repay the loan. Furthermore, there’s a good chance that you’ll be sued first rather than the main borrower. It’s because you’ll probably repay the loan quickly to maintain your credit score. If the primary borrower is unable to repay the loan, the cosigner’s assets and income may be at risk because the lender may be able to seize those assets.
3) Reduced Credit Ability
Other lenders view you as a cosigner when you have already agreed to guarantee a loan. The lenders make the assumption that you are already making monthly payments on the loan you have cosigned for, leaving little money available to make payments for a new loan. Consequently, you might have trouble getting approved for a new auto loan.
Is it wise to sign on as a cosigner?
You can agree to it when you are able to accept the risk, even though it might not be a wise financial move to cosign a loan. You might consider it if you have enough extra money or valuable assets to cover the primary borrower’s loan balance. Saying yes also makes sense if you plan to use the car.
A lucrative way to raise your credit score may appear to be cosigning an auto loan. However, dealing with a damaged credit score, enforceable legal judgments, and a decreased credit ability can mean all risk and no reward.
