What You Should Know About Cosigning for A Car Loan

One of life's most challenging moments is when your adult child asks you to cosign for a mortgage or your best friend has found the perfect car and wants you to cosign. These are people you love and care for, and while you want to step in and be a hero, you wonder, "Should I be doing this?"

Cosigning is a risky practice, and it is a practice you should avoid. Here's why:

#1 - If the primary borrower is late, your credit record may be adversely affected. Building a good credit history takes time and discipline, and by cosigning a loan you are jeopardizing your own good record.

#2 - If the borrower doesn't pay the debt, you could become responsible for the entire amount, as well as for late fees and collection fees. In some states the lender can actually pursue you first if the borrower misses a payment. You may end up getting sued, having your wages garnished, or having property taken away if you used it to guarantee the loan.

#3 - Cosigning a loan could affect your own ability to get credit down the line, as the amount of this loan may appear as an outstanding loan balance on your credit record. Lenders view a cosigned note as one that you may end up repaying in the future and will generally factor that in when deciding to approve or deny you credit.

#4 - The bank has determined that the borrower is not a good credit risk because of a poor credit history or lack of a credit history. If the professionals are not willing to gamble their money on this person, why would you?

#5 - If you cosign for a relative or friend, the relationship will be negatively impacted if they don't make the payments. Consider how you'll feel if the borrower doesn't make their loan payment and then buys a large-screen television or goes off on a seven-day cruise. Naturally you'll be upset, especially if you're being sued by the lender; however, the borrower may see you as the "bad guy" if you try to reason with them.

#6 - You're setting a precedent. Once you have cosigned a loan and word gets around, you'll likely be asked by other relatives and friends to cosign. If you turn them down they may be jealous of the other borrower and resentful towards you.

Saying 'no' to someone we care about is never easy, but it's a lot easier than having to go to court because the primary borrower defaulted. Make a promise to yourself that you will say 'no' to cosigning and 'yes' to protecting your financial security and peace of mind.