Cosigning a Car Loan: 5 Essential Tips for a Better Experience

Automotive financing can be tricky, stressful, and intimidating if you are unfamiliar with the process or worried about the outcome of applying for a car loan.

For new drivers, first-time car buyers, or people in the process of rebuilding their credit, seeking out a car loan can be a much bigger deal. However, arm yourself with all the tools and knowledge available, and automotive financing doesn’t have to be so scary.

In fact, one of the best ways to acquire financing if you’re in a sticky financial situation is to find a cosigner.

What is cosigning?

Cosigning on a loan means you agree to a certain amount of financial responsibility for the loan in exchange for improving the borrower’s approval odds or getting them a more competitive interest rate.

Usually, when cosigning on a loan, you’re essentially saying you will be financially responsible if the buyer can no longer make payments.

This may sound intimidating, but it’s actually a fairly common car-buying strategy with many financial upsides. There are multiple reasons a car buyer may want a cosigner, but also many unknown tips and strategies to have a better cosigning experience.

There are many reasons why getting a cosigner could be beneficial to someone taking out a car loan, and while a less-than-ideal financial situation can lead to the need for a cosigner, getting that cosign can actually make your financial situation a lot less stressful.

1. Know that cosigning could raise or lower your credit.

Cosigning on a car can impact your credit score in various ways and potentially have either positive or negative effects.

Positive impacts to credit:

Cosigning on a loan can diversify your debt. While having a lot of debt is a negative, having a reasonable amount of debt across significant areas like home and car ownership shows that you are utilizing debt in responsible ways.

Components of Your Credit Mix

Additionally, if the borrower you cosign for consistently makes their payments on time, you could see a boost in your credit score. This is where cosigning becomes mutually beneficial; the borrower gets a lower monthly payment through a lower interest rate, enabling them to make their payments more easily, thus improving both their own and their cosigner’s scores.

Negative impacts to credit:

Cosigning on a loan can increase your debt-to-income ratio, which is the amount of money you have borrowed versus the amount of money you are bringing in. If the loan substantially upsets your debt-to-income ratio, you may see a negative impact to your credit score.

If the person you cosign for does not make payments on time or misses payments completely, you may see negative impacts to your credit score.

If the person you cosign for defaults on their loan and the car gets repossessed, this will very likely show as an event on your credit report, and it can take up to 7 years for these events to stop showing on your credit report.

2. Know that you may become financially responsible for the cosigned car.

If the borrower of the loan you cosigned for stops making payments, the loan may become entirely your responsibility.

The lender and collectors can also find your information as the cosigner and reach out to you to collect late or missed payments, and these can include associated fees by the lender or collector.

Only cosign for someone if you are confident in your financial relationship with them and in their ability to take on the responsibility of the loan. Navigating financial difficulty with another person involved can be a rough road, so cosign responsibly.

3. You can use cosigning to help teach valuable financial skills.

Consider cosigning on a car loan for someone if that person can be trusted to learn the responsibility of taking on a car loan. For example, cosigning for your child’s first car purchase can be a great way to show your child how to make a monthly budget and become familiar with making loan payments.

Additionally, cosigning on a car loan with your child will help them build credit history, so long as they make payments consistently or you step in to help when needed.

This unlocks more purchase options for your child’s first car as well, like lower-mileage used vehicles or even a completely new car. In turn, your child will have a more reliable vehicle to drive while learning about financial responsibility and building credit.

5. Only cosign for someone you can trust.

As previously mentioned, financial difficulty can put a significant strain on any financial relationship. Only cosign if you can trust that the borrower can be responsible for the loan they are taking out.

Even if you are planning to cosign for someone you have absolute trust in, only cosign if you are prepared to make payments for the borrower in the worst-case scenario.

Have an exit strategy in case things worsen financially; take good mechanical and cosmetic care of the vehicle to protect its resale value. Stay informed of the car market around you and don’t let someone go upside-down on a car loan you’re cosigning on.

Make sure you and the borrower both have an emergency fund so that loan payments aren’t being skipped if financial stress arises in other areas.

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Ready to cosign?

In conclusion, cosigning can sound like a scary term in the world of car financing, but there can be many upsides to the move if you cosign for the right reasons and under the right circumstances.

Cosign for someone you trust and make sure your financial situation is in shape to back the loan in the worst-case scenario. Cover your bases, and you’re on the road to a better credit score!