The Dangers Of Co-Signing An Auto Loan

By nature, we are a giving group of people. We really want to help people when they are down on their luck; it is what we do as Americans, right? So you have a friend or relative who asks you to “just co-sign” a car loan so he or she can get around, take the kids to daycare, and get to work. It sounds easy and you believe he or she will do the right thing. Sadly, too often, these scenarios play out with a loss of money and a loss of the relationship.

Of course, there are exceptions. My Dad signed for my first car loan with me at 18-years of age. I co-signed for my son when he was 19-years old. Co-signing a loan for someone with no credit is one thing, but co-signing for someone with bad credit is another altogether.

Co-Signing an Auto Loan

Understand before you co-sign a loan, you are legally obligated to pay the balance of the loan if the other party defaults. Yes, you are just as obligated to pay as the person you signed for. That means the lender can go after you, force you to pay, and even get a judgment to attach property you already own, such as your home.

You may have perfect credit when you co-sign a loan, but if that loan defaults, you will have many consequences to pay. In a default, your credit score will plummet, forcing you to pay higher interest rates in the future. You may opt to sue the person you co-signed for, but odds are good, he or she has nothing to lose, so it turns out costing you more.

Odds are good, too, that the relationship with the person you co-signed for will be ruined. You are going to get frustrated, usually after the “I can’t believe he or she did this to me” syndrome, and you’ll get the “I’m doing the best I can” from the other party. I have seen this too many times.

Something else to think about…the loan you co-sign could affect your ability to get a loan yourself if you need to. Make no mistake; the loan you co-sign will be on your credit report. It will count against your debt-to-income ratio and will look like your debt obligation completely, as far as future lenders considering a loan.

Then there is insurance. If a person is struggling to make a car payment that you are on the hook for, he or she may opt to stop making their insurance payments. Should the vehicle get stolen or totaled out, the lender still expects payments and you are on the hook.

Three Ways to Protect Yourself

If you should decide to co-sign a loan, what can you do to protect yourself?

  1. Set yourself a reminder of when the payment is due, and make the other party give you proof the payment is made. Payments are due “on or before” the due date, not sent on the day it is due unless it is being paid electronically.
  2. Call the lender and ask that a note be made on the account that as the co-signer, you want to be notified immediately if a payment is 5 days past due.
  3. Call the insurance company and ask to be called ASAP if the insurance lapses.

These things can save your credit and the relationship with the person for whom you co-signed.

Being proactive, even with children, is always a good idea. The main thing to realize before you sign with someone is that a contract is a legal, binding obligation, just as if you were getting the loan yourself. In the eyes of the law, you are.

Photo Copyright: michaeljung/Shutterstock
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