If a friend or family member comes to you for help, your first instinct is probably to do whatever you can. After all, this person means something to you and you don’t want to see them in trouble. But if that person comes to you asking you to cosign for a car loan, you must take the time to consider it from all angles without letting your emotions get involved. Cosigning for a car loan is a way you could help that person deal with financial hardships without having to actually put out any cash. That alone make it seems like a win-win, but cosigning a car loan comes with some very serious risks. Consider each of these factors before you agree, and save yourself some real problems down the road.
First off, you must understand exactly what you are agreeing to when you cosign a car loan. At its core, becoming a cosigner means you are guaranteeing that the loan will be paid. Whatever debt your friend or family member is accruing, you are accruing as well. When it comes to a car that could be a significant amount of debt. And while you trust that you friend or family member will pay that debt off, prior to its completion the debt will show up on your credit report. That means that in the short term you have cut down on your ability to borrow money. The cosigned loan counts the same as if it is a loan you take out yourself, so when banks analyze your credit report, they may decide you have too great a liability. So if you expect to need to take out a loan at any point in the near future, cosigning for a car loan is a big risk.
You also must think about the consequences that will fall at your feet if your friend or family member defaults on the car loan. Of course you certainly wouldn’t have agreed to the loan if you thought he or she would not handle it responsibly. But you cannot predict the future, and anything can happen in this difficult economy. As the cosigner, you are the guarantor of the loan. So if the other party defaults, the remaining balance of the loan is yours to pay off. You will also be held responsible for any missed payments, late fees and costs accrued by collection agencies. In fact, if the other party disappears off the face of the earth your salary could be garnished by the collection agency! Then it will be up to you to get that money out of your friend or family member. This is certainly an unenviable position.
Perhaps you feel that this is overly dramatic? You know the person who has come to you for help very well, and don’t think things could ever get so out of hand. Well, that’s what the majority of car loan cosigners think, or the situation would never come up. However, according to studies that have been run by law organizations nearly 75% of loans that have a cosigner go into default at some point. So regardless of what you think, the relationship isn’t protecting you from those terrible odds.
Why is the risk of cosigning so heavy? Well, this person who came to you for help wouldn’t have needed help at all if the bank didn’t consider them a poor match. High risk auto loans are still given out, but a cosigned loan is essentially created so you are stuck taking the risk that the bank didn’t want to assume. In the end, you’ve got all of these potential issues and you don’t even get to enjoy the car. As much as you care for the person coming for your help, think long and hard about these risks before agreeing. It may save your credit rating, and your relationship.