The decision to cosign a car loan for someone should be taken seriously. There are five things to consider prior to signing onto any loan as a cosigner.
1) Financial Responsibility
The first thing to think about before cosigning a car loan for someone is your potential financial responsibility. As the cosigner, you will be held responsible for repayment of the loan if the primary borrower fails to keep up with the payments. There is a chance you will wind up either taking over the monthly payments or paying for the remaining debt once the car is repossessed by the lenders after loan default. However, if the person for whom you cosigned the loan makes the monthly payments throughout the term, you won’t need to worry about that financial responsibility.
2) Your Financial Situation
You should consider your own financial situation seriously before you cosign a car loan. Ask yourself if the monthly loan payments could be worked into your monthly budget without causing a serious strain on your finances. This is an important question to have a realistic answer to in case the borrower can no longer keep up with the payments on their own.
3) Credit Report Impact
As the cosigner on a car loan, your credit standing is just as much on the line as the primary borrower’s credit. Credit report impact can be both a positive and negative consequence. The credit reports of both you, the cosigner, and the primary borrower will reflect all of the loan activity. Missed payments, loan default, and repossession of the vehicle will all affect your credit negatively, even though it was the borrower initiating that negative activity. However, a healthy loan with a steady payment history will have a positive impact on your credit score.
4) Know the Borrower
You must know about the borrower’s responsibility level and financial situation before you agree to cosign a car loan. The negative consequences of cosigning a loan only come into play if the borrower fails to keep up with payments. Knowledge of the borrower will let you know whether or not they can be trusted with that responsibility.
5) Know the Loan
Never cosign a loan without reading and thinking about the terms. As with any contract you’re about to sign, check the fine print and ask all relevant questions. Look at the monthly payment the primary borrower will be making, and compare that to what you know of their income and credit history. Inquire with the dealership or financing company whether or not cosigners are able to be alerted to any late payments or receive monthly statements of loan activity. Gather as much knowledge as you can as to the specifics of the car loan.
Consider every potential consequence of cosigning a loan before signing the contract and committing to the responsibility. As with any contract or other financial agreement, there are potential consequences to the commitment.
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