Will Cosigning A Loan Help Me Get A Better Deal?
How does cosigning a car loan help?
When someone you care about needs to get a car loan, they might not have the credit history to qualify for the loan that they need to get started building a strong credit rating.
First you'll want to know exactly what your obligations are when you're cosigning a loan.
Responsibilities when cosigning a car loan
When cosigning a car loan, you are providing a guarantee for the loan. This means that while you are accepting some responsibility for the loan, you are not responsible for the regular car loan payments.
The person that you are helping by cosigning the car loan is responsible for making all of their car loan repayments.
Providing a guarantee
There's a distinct difference between taking out a loan as a co-borrower and cosigning for a car loan.
In the first example, you are taking equal responsibility for the other loan applicant for the loan repayments.
By cosigning a loan, you aren't committing to making the car loan payments. You are providing a guarantee that if for some reason the primary loan applicant can't repay the loan, the lender can recover the loan money from you.
It's like going guarantor for a mortgage, but the obligation that you commit is much smaller. You're pledging thousands rather than hundreds of thousands of dollars.
Why cosign a car loan?
There are some compelling reasons for cosigning a loan to help someone you trust and care about buy a car.
- Get your loved one started building their credit rating for the future.
- Provide a way for the buyer to purchase the car they need.
- Educate the buyer on the responsibility that comes with a credit contract.
What are the risks of cosigning a car loan?
When you cosign a car loan, you are providing a guarantee to the lender that the loan will be repaid in full. This affects you in several ways:
- While you are not responsible for making repayments on the car loan, lenders will factor the loan amount into your current debts when evaluating your credit report.
- This increase in your total debt could negatively impact your credit score.
- You might not be notified immediately if the primary car loan applicant stops making repayments.
- If the primary applicant does miss payments or default on the loan, this could affect your credit rating.
- If the debt is not repaid, the lender may attempt to collect the balance of the loan from you as the cosigner.
- If the unpaid car loan account is sold to collections, this will be reported on your credit report as well as to the primary loan applicant's report.
If the primary loan applicant does make every payment on time, then the loan will be closed at the end of the loan term and your obligations cease.
Other ways to help someone build credit
You can help someone to establish a credit rating without cosigning a loan. Some of the options include adding them as a joint account holder or an authorised user to your credit card account.
A joint account holder will be responsible for making payments on the credit account.
An authorised user is not responsible for paying the account, but they can use the credit card. Both of these options give the opportunity to teach the person about using credit.
However, if you really do need to buy a car, cosigning a car loan might be the best option.
Get independent advice
If you have any questions about the impact on your finances and credit ratings when cosigning a loan, chat with your accountant or financial advisor.
Remember that you are invested in the car loan too, so you will want to make sure that the person you're cosigning a loan for will get a genuinely good deal.
Read this article on "How To Pick The Best Car Loan For Me" for some insight into getting the right car loan. You can also work with a car loan broker to compare the options for cosigning a car loan.
Getting the best possible car loan will ensure that your generous gesture of cosigning a car loan brings minimal risk to you and maximum benefit to the person you are cosigning a loan for.