Considerations before making the decision to cosign a car loan can include the terms of the loan, the circumstances, and the reliability of the borrower. It is important to be aware that cosigners assume responsibility for the loan, which means that if the primary borrower stops paying, the cosigner will be responsible for any outstanding debt. This can include late fees, penalties, and other fines associated with the loan. There are, however, some measures people can take to protect themselves when cosigning.
Someone looking for a cosigner may have a poor credit history, either because of youth or adverse credit events in the past. Before agreeing to cosign a car loan, it is advisable to look at the borrower’s credit history and review the terms of the loan. The monthly payments should be within the borrower’s means, and the borrower should have some money set aside to cover payments in the event of a situation like job loss. If the payments are high, the interest appears excessive, or the down payment is very low, it may be a poor risk.
Cosigners not only need to take over responsibility for the loan if the borrower fails, they also have the loan on their credit records. People with good credit may want to consider whether they are willing to take this risk, especially if they are preparing for a major purchase like a new home within the next few years. Lenders can agree to send statements and late payment notices to the cosigner as well as the borrower, allowing cosigners to keep up with what is happening on the loan so they can take action before it creates a black mark on their credit.
People who agree to cosign a car loan should make sure the title includes their name and they are listed with an “and,” indicating the car cannot be transferred without their consent. It is also advisable to make sure insurance is carried on the vehicle, and that it is comprehensive so in the event the car is totaled in an accident, the loan can be paid off with the proceeds from the insurance. An insurance agency can send updates to someone who has consented to cosign a car loan to keep that person apprised of the car’s insurance status.
Financial arrangements between partners, parents and children, or friends can go sour. This is a consideration to think about before making the decision to cosign a car loan. While people may be getting along at the time the loan is issued, a long-term agreement like five year loan leaves numerous opportunities for disagreement. It is advisable to have a plan in place for handling disputes, such as appointing another party a third-person mediator for handling arguments.
