What are the repercussions in cosigning a car loan?
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UPDATED: Oct 9, 2012
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Anyone who cosigns a car loan is responsible for that financing if the actual borrower fails to keep up with payments. This can have massive repercussions for both parties in the event the primary borrower defaults.
Car loan questions usually pertain to borrowers, however, cosigners should ask questions of their own prior to signing a contract.
Unemployment, increased expenses, loss of equity, or any number of other causes can lead to defaults. Subsequently, lenders will do everything in their power to collect on the owed debt.
Naturally, this can be a serious problem for someone who guarantees a car loan on behalf of another borrower. If a lender cannot obtain monthly payments then that lender will probably repossess the borrower’s vehicle and possibly use collection agencies to retrieve any remaining funds from the borrower’s cosigner. Subsequently, both parties’ credit scores will be equally damaged. The loan that both parties agreed to repay will be included on their credit reports, just like any other unpaid debts.
In addition to personally guaranteeing a loan, cosigners should remember that, as a result of agreeing to a contract, their debt-to-income ratio will change since they will be responsible for additional debt. This can have adverse consequences if a cosigner wishes to obtain financing of their own in the near future.
The level of trust and understanding between a borrower and a cosigner can determine if it is wise to personally guarantee an auto loan. While family and friends tend to help one another out, a borrower who fails to repay their car loan may end up damaging a relationship with their cosigner. Ruining family relationships over money is never a wise move.
However, cosigning is still an excellent way to help a responsible borrower or loved one in need. Often times, it is the only means for a borrower with poor credit to receive financing.
There can even be benefits beyond attaining ownership a vehicle since helping a borrower obtain financing can build credit. This can help a borrower acquire a credit score that would allow them to obtain financing on their own in the future.