Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 2, 2011

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It’s not uncommon for a parent to co-sign on an auto loan for their children. But co-signing doesn’t just lower interest rates and assist in helping an applicant qualify for a loan—it also puts the co-signer at risk. Given those risks, it’s wise for a co-signer to know his or her responsibilities and rights.

Co-signing on a loan is simply the act of saying, “If the borrower defaults, I will cover his loan.” Co-signing alleviates risks lenders take on when granting loans to borrowers—particularly borrowers with bad credit or little credit history.

What’s more is if the primary borrower begins to default on their loan, the co-signers credit score gets thrown into jeopardy. If the borrower continues to be delinquent on loan payments and the co-signer isn’t informed or doesn’t learn about it personally, then the lenders and collection agencies will report the co-signer’s name along with the primary borrower’s name to credit scoring companies.

Given these risks, potential co-signers should think carefully before putting their signature down on the dotted line.

The Federal Trade Commission’s issued a warning on co-signing a loan saying “as many as three out of four cosigners are asked to repay the loan.”

When it comes to auto loans, they should be in a financial position to take on the full cost of the automobile just in case the primary borrower leaves them with the car loan payment.

In the event the primary borrower does default on the auto loan, the co-signer has the right to take the loan over, make payments themselves, and effectively save their credit score. They would also be saving the primary borrower’s credit score.

This is particularly important for parents who have co-signed for their children.

After a parent takes on ownership of the auto loan, they can then arrange a personal payment plan with their child so that the loan is paid off, the vehicle is not repossessed, and their child is spared the long-term credit damage.