We may all have experienced a situation where a friend or family member asks you to become a co-signer. Before you say yes, it’s best to know what you’re getting into. If you’re considering signing for a car loan, you usually agree to repay the loan amount when the primary borrower stops making payments. While you agree, the risks outweigh the benefits. You may think of it as a way to improve your credit score, but don’t delve into it until you fully understand the risks involved.
Risks associated with co-signing a car loan
1) Damaged creditworthiness
To achieve a good credit score, decent efforts are required. If you become a co-signer, any form of delay or non-payment of the car loan will affect your credit report. The primary borrower’s inability to make the payments can reduce your credit score. Plus, your debt-to-income ratio increases when you become a co-signer. Ideally, a debt-to-income ratio should not be higher than 36 percent. Being a co-signer increases your debt against your income. And your credit score decreases due to the increased amount of debt. Therefore, if the borrower has a bad credit history, reconsider your decision.
2) Enforceable court judgments
If the primary borrower is unable to repay the loan, the lender may take legal action against the co-signer. In addition, there is a high probability that you will be sued before the main borrower. It’s because you’ll likely repay the loan amount quickly to protect your credit score. In the event that the primary borrower is unable to repay the loan, a co-signer’s assets and salary may be at risk because the lender can claim their assets.
3) Reduced creditworthiness
If you’re a co-signer, other lenders see you as someone who has already agreed to guarantee a loan. Lenders assume that you are already making monthly payments for the loan you co-signed, leaving little money left over to make payments for a new loan. So a new car loan approval could be difficult for you.
Does it make sense to become a co-signer?
Although becoming a co-signer may not be a financially sound decision, you can agree to that if you’re able to afford the risk. If you have a good amount of excess cash or have significant assets to repay the primary borrower’s loan amount, you can think about it. Even if you use the car, it makes sense to say yes.
Co-signing a car loan can look like a lucrative way to improve your credit score. However, it can all mean risk and not reward if you are dealing with a damaged credit score, enforceable court rulings, and a diminished credit score.
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Wendy is now a financial analyst and writer. Wendy has been writing about finance and personal finance since she was a sophomore in high school. She has also been writing for several online publications and published in The Huffington Post, and Forbes Woman.
Wendy is a credentialed financial analyst and has experience working with financial institutions and businesses. Wendy is also a certified financial planner. When Wendy's not writing, she enjoys tending to her many plants, watching TV, and spending time with her family.
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