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What to Know Before Co-signing a Car Loan

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Not everyone can get approved for a car loan. Oftentimes, they have to either wait and build up their credit or find a co-signer.

For many young adults and teenagers, they may find eager parents who are more than willing to be their co-signers on a car loan.

However, just like people should look before they leap, parents and others who are willing to help should be aware of potential consequences before they co-sign a car loan.

The Co-signing Demographic

Co-signing isn’t for everyone. In fact, there is only a certain demographic that should seek out a co-signer: people who lack the credit to get a car loan themselves.

Richard W. Hayman, CEO of the Petting Zoo Inc., told loans.org that he wanted to help his daughter establish a great credit history after she finished college. So, he co-signed her car loan and arranged for the bank to deduct payments directly from her account. He also arranged to have the payment amount transferred from his account to his daughter’s account each month. This all allowed for an expedited payment routine.

“The bank was happy, I was happy, and it got us the desired results. My daughter had no credit history as she was a college student with just a checking account that was joint with me. This loan was the first time her Social Security number appeared in the financial system,” said Hayman.

It was Hayman’s banker who actually suggested the automatic withdrawal from “her” account with “his” money deposited monthly. It even got her a lower interest rate on her car loan.

“My banker was a great help and thought it was a good way to both get [my daughter] the car and start her credit history as well,” said Hayman.

In this situation, everyone won. The bank made money off the car loan, this daughter got a car while building up her credit, and Hayman helped out his daughter. Unfortunately, in a world of less-than-perfect people, not everyone in every lending situation can win.

Predators and Scores

Sherrie Kelley is a Bookkeeper for Yuma Furniture. When she was younger her parents co-signed a car loan for her, and later in life she co-signed a car loan for her daughter.

“The one thing to remember is be careful of predatory lenders,” she said. “They will hike your interest up.”

In order to avoid those predatory lenders, Kelley has two words of advice:check your credit score before you even begin looking for a new car, and make sure you credit score is 650 or higher.

According to her, most young people do not understand how important credit scores can be and how much credit scores determine the cost of loans, insurance, and credit cards. 

The higher the score, the better the chance an applicant will be offered a loan with terms in their favor. Of course, people with low or bad credit can still get loans, yet they oftentimes have to pay more in the long run. Since people with bad or poor credit are often left with few willing lenders, many predatory lenders seek to deceive and offer them loans on unethical and potentially unlawful terms.

Borrowers can always check out a business’ reputation of course. This holds especially true for online lenders that deal with and process applications faster than in-person car loan lenders. Click here to visit an online application and see just how quickly it takes for you to get a car loan quote.

Even a former employee of a dealership has experience to share and advice to give to co-signers and borrowers looking to find a co-signer.

A Former Dealer’s Take on Co-signing

Scott Neuman, President of Recordweb Communications, worked for five years as a finance manager for a Honda dealership. He was even named Honda’s number one salesperson for selling more than 500 cars annually, which is a title he held for several years. As one can imagine, he has a wealth of advice for anyone thinking of co-signing a car loan.

“It’s very important for people to know that if you co-sign for a loan, and the other owner of the car doesn’t pay for it, you as the co-signer are on the hook for the loan,” he said. “You are still liable for the full payment of the car. My advice is to never co-sign for the loan unless you are prepared to own the car and take over the payments.”

Neuman advises co-signers to think and act like they are buying a new car since they will be completely responsible for payments should the borrower fail to make them. Should these payments cease, then they will suffer the consequences.

“It draws down their credit score and if the other person misses payments, it will affect their credit score in a negative way,” he said.

While working as a salesperson, Neuman saw brothers and sisters co-sign for each other as well as parents cosigining for their children, showing just how intimate and reserved the process is for blood relatives.

He advises co-signers to make sure that the borrower is not a person who lives beyond their means since all co-signers can end up being “on the hook” for the entire amount of the car loan.

Neuman’s own father co-signed his first car loan when Neuman went into business for himself. Fortunately for his father, Neuman never missed a payment. Had he missed a payment then Neuman says his father would have been responsible for any remaining balance owed to the car loan lender.

Still though, not all car loan lenders are the same. As vehicle shoppers are well aware, car loans can be found at dealerships, finance companies, banks, and credit unions. The latter of which can be a hidden gem for borrowers looking for a good interest rate according to Neuman.

“I’ve seen many times where Ford or GM or a local bank would come back with a high interest rate or ask for a co-signer only to have the buyer walk in with a check for the entire amount and a rate of 2.5 percent because they were credit union members,” said Neuman.

As benevolent as being a co-signer is, it is not a risk-free endeavor. Co-signers should recognize this and only become a co-signer to someone they truly care about and for whom they know is financially responsible. To do anything else is to welcome risk and financial trouble.