The Major Risks of Cosigning for An Auto Loan

The Major Risks of Cosigning for An Auto Loan

When a friend or family member needs your help to cosign on an auto loan, it’s something you (or anyone else, for that matter) are going to have to really think about and consider. When you cosign on a loan or any other kind of financial risk, you’re putting your own credit and financial reputation at stake. There are a whole lot of factors to consider — like the risks and benefits, for one very immediate thing — when you’re thinking about going in on an auto loan with someone else, and no matter how much you trust or love the other cosigner, it’s important to take absolutely every possible outcome into serious consideration. When your finances are involved and your credit can be affected as much as something like a car loan can affect it, you need to make sure you take your time and think about everything that should be considered. Cosigning on a loan is a huge commitment, and we’ll talk about some of the biggest potential risks of which one should be aware when considering something like this. Knowing these can help you avoid potential financial ruins at the hands of misplaced trust.

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For one thing, you should know your cosigner’s credit score and financial history. If they’ve asked you to cosign on a loan in the first place, it’s because their credit score is either not high enough to get them the loan in the first place, or because it’s not high enough to get them an APR that they can handle (or that makes sense in the first place). It’s important to understand exactly why this person needs to cosign, because you’re taking on some serious risk. Namely, your credit score can be seriously affected by a loan upon which you’ve cosigned very badly. If the original applicant defaults on it, as the cosigner you’re held responsible. This means your consequences could basically be twofold: you’re responsible for paying back the debt that your cosigner has bailed upon, and your credit will also take a serious hit.

You basically risk losing a lot of money and having your credit score seriously reduced if you cosign on a loan with the wrong person. There are a lot of reasons an individual might need a cosigner, and insufficient credit history is one of them. This is a case with a lot of minors or individuals applying for their first loans or lines of credit. If your child needs a cosigner then you’re a significant amount safer — you can monitor how well your children are doing at paying the loan back, and can likely afford to step in and help out if the need arises. Whether it’s a bad credit auto loan or just a simple student aid situation, cosigning on a loan is a serious commitment that requires a lot of thought. There is some serious risk involved, but everyone should assess their individual situation.

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