Can my parents cosign on an auto loan for me?
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UPDATED: May 2, 2013
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Yes, your parents can cosign on an auto loan for you.
In fact, there are several benefits when parents do so for their child.
Gail Cunningham, Vice President of Membership and Public Relations at the National Foundation for Credit Counseling, told loans.org that when parents cosign on car loans for their children, it could help their son’s or daughter’s financial reputation.
“Assuming payments are made responsibly, this activity will help build a positive credit report for them,” said Cunningham.
However, cosigning on auto loans shouldn’t be done without careful consideration.
Cosigners will experience an inquiry into their personal credit report. Additionally, cosigning on an auto loan will impact a signer’s credit utilization ratio, which will reflect that the cosigner now owes more money (the auto loan) than before, despite the fact that they’re not the primary borrower. Finally, cosigning is the loose equivalent to “guaranteeing” a loan.
“The co-signer should be aware that activity will be reported on both credit bureaus, thus if the child is supposed to make the payments and doesn’t, the parent’s credit score could be negatively impacted,” explain Cunningham.
Additionally, lenders may pursue the cosigner for the remaining balance of the auto loan in the event the primary borrower defaults.
In the interest of maintaining a healthy family relationship, Cunningham advises parents and family cosigners to create a contract between themselves and the borrower (even though the borrower is the cosigners son or daughter) that covers what will happen if the borrower defaults on their auto loan payments.
Parent cosigners should take special care to avoid the development of a dependent relationship if their children are unable to make payments on their auto loans.
“If the parents have a tendency to always bail out their child, that would probably extend to financial matters,” said Cunningham.
She explained that it is in the best interest of the child to be responsible for payments and actually pay them. This allows the borrower to experience real world consequences for earned money, finance, and a promise to pay.
To begin your process of applying for an auto loan (cosigner or not), use this online application.