Risks Of Cosigning A Car Loan
In today’s money-tight economic climate, more and more borrowers are being asked to provide a cosigner. No credit history is as likely to be the reason as poor credit. Whatever the cause, especially if it’s a family member or friend, you are likely to want to help them out. But, before you sign on the dotted line, you need to take into account the possible negative outcomes.
Consider this: The Federal Trade Commission reports that three out of four co-signed loans with finance companies wind up being paid by the cosigner. That’s a whopping 75%! Obviously, the risks are considerable and the odds are definitely not in the cosigner’s favor. Other considerations include:
• The first inkling a cosigner may have of a problem is when a notice of delinquency is delivered by certified mail.
• Penalties can add up quickly. A cosigner can be found responsible for any late charges and penalties, as well as legal fees that are connected to missed payments.
• The lender does not have to utilize every possible process to get the money from the borrower before he comes after the cosigner.
• The creditor can use all the standard collection methods against the cosigner. These include filing a lawsuit and garnishing your wages.
• When a debtor defaults, the lender may also inform the credit bureaus, which will negatively impact the cosigner's credit score. This damaging information will also have a lasting and harmful effect on current and future borrowing. This can lead to an increase in interest rates on existing balances and lower the amount lenders are willing to loan you in the future.
• Repossession of the car is also a possibility. If the lender sells the vehicle at an auction, the lender will expect the remaining balance due on the loan to be paid by both the original signer and also the cosigner.
• A cosigner may also be found liable if the vehicle is ever involved in an accident. This is true even if the co-owner has never driven the vehicle.
In conclusion, a cosigner needs to understand that they are not merely vouching for someone else’s ability and willingness to repay a debt. It’s not like giving a reference for a job application. The cosigner is promising, in writing, to pay the debt themselves if the actual borrower cannot.
Nice guys, in particular, are likely to evaluate their buddy’s ability to repay based on their work history and character. But, don’t forget that unforeseen things happen. People lose their jobs, get divorced, get sick and sometimes they even die unexpectedly. So, the really big question is whether or not you can afford the debt if your buddy defaults for whatever reason.
Lastly, you might think about a personal loan before a co-signing agreement. That way, your friend stays out of trouble, your credit history stays clean and you remain BFs forever.
If you are still determined to become a cosigner, here are a few tips from the FTC to minimize your risk:
1. First, ask the lender to put in writing that you will be notified if the borrower doesn't make a payment. That will insure that you get a “heads-up” before the situation gets out of control.
2. Second, ask if you can limit your responsibility to the value of the loan itself, and not late charges or other collection fees.
3. Before you make the final decision, ask about the purpose of the loan, the type of loan and the terms.
4. Also, know the lender especially if it’s a finance company. They typically charge higher interest rates and accommodate people with poor credit.
Unfortunately, in the case of car loans in particular, the owner often ends up owing $8,000 on a $4,000 vehicle.
Are there ever times when cosigning makes sense? For example, many parents agree to cosign for their children to help them establish credit. This is more prevalent today because of new credit card laws limiting credit to teens. If you decide to help them get started, be sure to begin with a low limit and set definite rules on how the money is to be used. That way, you help them build credit while only subjecting yourself to a very small risk. Establishing their own credit early on may also ward off the need for parents to become a significant cosigner later. That’s a good thing.
Resource: FTC Cosigning a Loan
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