We all may have experienced a situation where a friend or family member asks you to become a cosigner. Before saying yes, it’s best to know what you’re getting yourself into. Typically, when you consider co-signing an auto loan, you agree to repay the loan amount if the primary borrower defaults. While you agree, the risks outweigh the benefits. You may consider it a way to improve your credit score, but don’t delve into it before you fully understand the risks associated with it.
Risks Associated with Co-signing an Auto Loan
1) Damaged Credit Score
Getting a good credit score requires decent effort. When you become a cosigner, any form of late or non-payment on your auto loan will show up on your credit report. The primary borrower’s inability to make payments can lower your credit score. Also, your debt-to-income ratio increases when you become a co-signer. Ideally, your debt-to-income ratio should be no more than 36 percent. Being a cosigner increases your debt versus your income. And your credit score decreases due to the increase in the amount of debt. So if the borrower has bad credit, reconsider your decision.
2) Executory judicial sentences
When the primary borrower is unable to repay the loan, the lender can take legal action against the cosigner. In addition, there is a high probability that you will be sued before the main borrower. This is because you are likely to pay off the loan amount quickly to protect your credit score. In the event that the primary borrower is unable to repay the loan, the co-signer’s assets and salary may be in jeopardy as the lender may claim his or her assets.
3) Reduced credit capacity
When you are a cosigner, other lenders see you as someone who has already agreed to guarantee a loan. Lenders assume that you are already making the monthly payments on the loan you co-signed, leaving little money to make payments on a new loan. Therefore, getting approved for a new car loan can be difficult for you.
Does it make sense to become a Cosigner?
While it may not be a financially sound decision to become a cosigner, you can accept it when you are able to take the risk. If you have a good amount of surplus cash or possess substantial assets to pay off the primary borrower’s loan amount, you may want to think about it. Also, if you are going to use the car, it makes sense to say yes.
Cosigning an auto loan may seem like a lucrative way to improve your credit score. However, it can mean all risk and no reward when dealing with a damaged credit score, enforceable legal judgments, and reduced credit worthiness.
