3 Reasons You Shouldn’t Co-Sign That Loan

A few years ago, a friend told me he didn’t have the credit to get a car loan. Would I co-sign for him? I almost did it, but my father stopped me with some wise advice: “Don’t gamble with your credit score for someone else’s benefit.”

So I didn’t co-sign, but my friend found someone else to do it. Nine months later, he stopped making payments, the lender repossessed the car, the co-signer’s credit was ruined, and I had narrowly escaped financial disaster.

That’s my story, but co-signing a car, or any loan, is rarely a good idea for anyone. Money Talks News founder Stacy Johnson explains why in the video below. Check it out, then read on for more reasons on why you shouldn’t co-sign – and some tips when you do it anyway…

Here’s a recap of why you should be wary of co-signing. And keep in mind that we’re talking car loans in this post, but the advice applies to any loan…

1. You’re responsible for the loan

By co-signing, you agree to take over the loan if the primary borrower doesn’t pay. In 2011, 0.51 percent of all auto loans were delinquent – meaning they were at least 60 days late, according to Bankrate. If you had co-signed one of those loans, the lenders would be looking to you for money.

And that could spell financial disaster. Experian’s State of the Automotive Finance Market report shows that in the fourth quarter of 2011, Americans borrowed an average of $26,419 for new cars and $17,404 for used cars. I know I don’t have $26,000 lying around to cover someone else’s loan – or extra money to make their payments.

2. You’re risking your credit rating

Your credit rating will tank if your friend or family member’s car is repossessed or they make late payments. Repossession appears on your credit report for seven years, starting from the first missed payment, Experian explains. If the lender sends the account to collections – and they will – the collection will also show on your credit report for seven years.

3. You’re risking your borrowing power

Here’s how my scenario would have played out if I had agreed to co-sign:

At the time, I had a car and a good credit rating. I co-sign my friend’s car loan. Nine months later, he defaults on the payments and the car is repossessed. A year later, I need a new car, so I apply for a loan. The lender sees a repossession and a collection on my credit report. At this point, I imagine the lender doubling over in laughter as he turns me down.

You’ll have a hard time qualifying for any loan with a black mark that serious on your credit history. And if you do qualify, you won’t get the best (or even good) rates. For example, in the fourth quarter of 2011, the average interest rate on an auto loan was 4.54 percent for a prime borrower, according to Experian. Nonprime borrowers qualified for 6.34 percent on average, and subprime borrowers got 9.55 percent on average.

Not convinced? OK, if you’re going to co-sign anyway, at least heed this advice…

1. Put your name on the title

Stacy said it best…

“If you’re co-signing a car loan, make sure your name is on the title as co-owner. You owe, you own.”

That will be important if you can take possession of the car should the primary borrower stops making payments. Then you can drive the car – or, providing they agree to sign over the title, sell it to help pay off the remaining balance.

2. Ask for a key

You’re an owner of the car, so you should also have a key to it. Having a key will make it easier should you ever need to take possession of the car.

3. Monitor the payments

If you’re willing to co-sign a loan, then you need to be willing to babysit that loan. That means making sure the payments get paid on time every month: ask for proof. It’ll be a hassle, but you’ll protect your credit rating – and your money.

4. Keep up with insurance

Don’t forget the insurance. If your friend totals the car and it’s uninsured, he probably won’t be able to cover the cost of repairs or replacement himself – and he may not feel like paying a loan for a car he can no longer use. Guess who that leaves on the hook? You might want to suggest your friend read 6 Steps to Pay Less for Car Insurance.

And if neither of you can really afford to be on the hook for an expensive car, check out 8 Tips for Buying a $5,000 Car.

How to find cheaper car insurance in minutes

Getting a better deal on car insurance doesn't have to be hard. You can have The Zebra, an insurance comparison site compare quotes in just a few minutes and find you the best rates. Consumers save an average of $368 per year, according to the site, so if you're ready to secure your new rate, get started now.

Read Next
19 Things You Should Never Buy at a Grocery Store
19 Things You Should Never Buy at a Grocery Store

These household necessities are overpriced at the grocery store. Get them cheaper at these places instead.

7 Free Tools for Saving More Money at Amazon
7 Free Tools for Saving More Money at Amazon

Use these websites and other tools to save money — or earn extra cash — when shopping at Amazon.

Stop Overpaying for These 10 Common Purchases
Stop Overpaying for These 10 Common Purchases

The best price for many of these items is “free.”

These Are the 9 Best Benefits of Amazon Prime
These Are the 9 Best Benefits of Amazon Prime

These top-notch perks of an Amazon Prime membership won’t cost you a dime extra.

This Grocery Store Is Cheaper Than Even Walmart
This Grocery Store Is Cheaper Than Even Walmart

One grocery chain is likely to save you more money than any other.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

This Is the Most Popular Age for Claiming Social Security
This Is the Most Popular Age for Claiming Social Security

Both men and women are most likely to start receiving Social Security benefits at this age.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?
Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

6 Things You Should Never Buy at Trader Joe’s
6 Things You Should Never Buy at Trader Joe’s

We love Trader Joe’s for plenty of reasons. But think twice about this handful of products.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have these documents that are crucial to their golden years — especially during a pandemic.

Don’t Toss These 7 Household Items — Sell Them
Don’t Toss These 7 Household Items — Sell Them

Here’s how to earn cash as you give new life to these unwanted items.

7 Unusual Ways to Declutter Your Home
7 Unusual Ways to Declutter Your Home

Tired of possessions weighing you down? Here are seven ways to declutter painlessly and effectively.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

9 Dumb Ways You Are Ruining Your Home Value
9 Dumb Ways You Are Ruining Your Home Value

Homeowners, beware these mistakes that can drive away potential buyers.

21 Things You Should Always Buy at a Dollar Store
21 Things You Should Always Buy at a Dollar Store

Dollar stores have great bargains on both everyday and occasional purchases.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

7 Tips for Building an Emergency Stockpile
7 Tips for Building an Emergency Stockpile

A pandemic or natural disaster could leave you reliant on your existing food supply. Is your pantry prepared?

18 Amazon Purchases That We Are Loving Right Now
18 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

15 Outrageously Overpriced Products — and How to Save on Them
15 Outrageously Overpriced Products — and How to Save on Them

Retailers mark up products by hundreds of times their cost — but you don’t have to pay the premium.

Why Half of Retirees Now Owe Taxes on Social Security
Why Half of Retirees Now Owe Taxes on Social Security

Growing numbers of seniors are paying taxes on their Social Security benefits, but you might be able to avoid this fate.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.