When is it best to cosign on an auto loan? The answer is definitely not black and white. There are many advantages and disadvantages for both the borrower and the cosigner. A borrower and a cosigner must be aware of the fiscal obligations of the auto loan.
What Is Cosigning?
Cosigning on a loan is a relatively easy concept. Basically, a person asks another person to sign a promissory note on an auto loan, thus ensuring that the loan gets repaid from the cosigner, if the original borrower defaults on the loan.
Who Needs a Cosigner?
A person with bad or no credit rating might need a cosigner for a loan. Another reason for a cosigner is if the debt to income ratio exceeds the desirable range of the loan. This implies that the borrower may struggle to make the payments.
When a person cosigns on a loan, that person is personally guaranteeing that the debt will be repaid. If the borrower defaults, then the cosigner must repay the loan back in full.
Advantages of Using a Cosigner
The cosigner has the chance to help out family or friends.
The borrower has the advantage of having a strong credit rating as backing for the loan. The borrower may not have been able to get the automobile, which may significantly improve that person’s living conditions, without the cosigner.
An auto loan is a short term loan compared to a mortgage loan.
Ways to Protect Yourself
Before cosigning on a loan, make sure to ask the borrower why he or she is unable to get approval for a loan. Ask about their credit problems. You might even ask to see a copy of their credit report.
Make sure to get details about the proposed loan, such as the type of loan and the term of the loan.
Do not offer collateral that you are not willing to lose, such as your house, your car or another asset. Make sure that the borrower uses their own collateral.
Speak to the lender about the terms of the loan. Try to convince the lender to specify the maximum amount of money you could owe, so you won’t have to deal with rising interest rates or other such problems. You might ask the lender to agree to waive late fees, court costs and other payments if you end up liable for the loan.
Make sure that you are alerted by the lender any time that a payment is missed, so you can nip the problem in the bud before it spirals out of control.
Ensure that the title lists you as a co-owner if you decide to cosign. This will enable you to sell the property to repay the debt.
Draw up a contract between the cosigner and the borrower. If the borrower defaults on the loan, make sure to reference the contract. You may have to take the borrower to court to fulfill their obligations.
There are positives to cosigning on a loan. Helping a family member or friend can be gratifying. However, the world is full of good intentions, and unless you are willing to risk the possibility of meeting that person in court, consider your options before cosigning on a loan.