Inherent risks exist when co-signing a car loan

If your co-signee defaults, you won't know about until it's too late

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question for the expert

Dear Credit Guy,
I have a very good student who is about to commute to college. She needed a car, but her credit was not good enough to purchase a car. She has turned to me to co-sign for her. I am a little scared about the whole thing, but I'm thinking that this is the only way for her commute. My question is: Can I withdraw when she builds her credit or can I take the car from her if difficulty strikes? She has 72 months to have an opportunity to ruin my credit. What is the best way to deal with this situation? Please help. -- Cassey

Answer for the expert

Dear Cassey,
I hope you and your student have not yet purchased a vehicle. I would like you to consider several things before you take the plunge and co-sign a loan with her.

First, you need to decide if you can afford to purchase a car. Why? Because you should never co-sign a loan unless you are willing and can afford to make the payments yourself. Too many times, the person who does not qualify for a loan and needs a co-signer ends up defaulting on the loan. When you think about it, the lender isn't willing to take the risk, so should you? In the event of a default, the loan then becomes the co-signer's responsibility. For this reason, you should only consider co-signing the loan if the monthly payment on the loan will fit your budget.

If you determine that you can afford to and -- more important -- wish to make the monthly payment should you be required, I would also recommend financing a vehicle for no more than 36 months. Cars lose value quickly. Without a sizable down payment, a 72-month term will almost guarantee that the loan will be upside down (meaning the car is worth less than what is owed on the loan) from the beginning. So, you might consider shopping for a quality, reliable used vehicle that you can afford to finance for 36 months or less.

Second, once you co-sign the loan, the only way that your name and financial responsibility can be removed from the loan is if it is refinanced into a totally different loan in your student's name only. It is very unlikely that your student would qualify for a refinance of the loan before the term was ended -- especially if the rationale for refinancing is because she has missed payments. In addition, any missed payments will negatively affect your own credit. And the biggest problem with missing payments is you will be unlikely to know until the bank calls wanting payment from you and the damage to your credit is done.

Finally, as a co-signer you would have the opportunity to take possession of the car if your student did not make payments on the loan as long as you remain on good terms and you have access to the vehicle. Keep in mind that if you did take possession and wished to sell the car to be relieved of making payments, you may be unable to sell the car for what is still owed on the loan. Again, keeping the loan term as short as possible and making a down payment will help with being upside down in the loan.  

Take care of your credit!

See related: The risks you face when co-signing a loan, Should you ever co-sign a loan?, Escaping co-signing: How to get out of co-signed loan, credit card

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Updated: 03-24-2019