How to Decide If Co-signing a Loan Is a Good Idea
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How to Decide If Co-signing a Loan Is a Good Idea

Cosigning a loan isn't usually a smart financial move for the prospective cosigner.

Many people who are trying to buy a car for the first time or who want to buy a car with bad credit can not qualify for a loan on their own. Many times, car dealers will recommend finding someone to cosign the loan with them. Unfortunately, cosigning a loan is not usually a good option for the cosigner. Before taking on this responsibility, the potential cosigner should make sure that it is a good idea for both parties.

Know what you're getting into.

Some car sales people make an effort to to honestly present the options. Others tend to be a bit evasive or downright dishonest as they explain what will happen. For example, if the potential cosigner balks at adding his or her signature to the loan application, the car dealer may say something like, "Oh, no. We're asking you to sign instead of cosigning." The truth is that, as far as the bank is concerned, signing is exactly the same thing as cosigning. If your signature appears on the paperwork, you can be held liable for the loan and it can affect your borrowing power. 

Realize that the person buying the car may not be able to refinance in six months.

Many times, someone decides that they'll cosign on a car loan because the car dealer tells them that the person buying the car can refinance in six months. Most bankers will be quick to tell you that this is very, very unlikely. Someone who has no credit at all may be able to get a refinance offer. Someone with bad credit, especially if he or she is just going into or coming out of bankruptcy proceedings, probably will not have a big enough jump in their credit rating in that short a time period to qualify. Anyone who cosigns a loan should do so with the understanding that it may be for the entire life of the current loan.

Understand that cosigning may not improve your credit.

Someone who has not had a big purchase like a car loan on his or her credit report usually doesn't have as good a credit score as someone who has had a car loan or home loan and has been paying it off in a reliable manner. However, this doesn't mean that cosigning a loan with someone else is going to improve your credit. In fact, if that person defaults on the loan or is late with payments, your credit will be worse instead of better.

Think about whether you be able to keep up payments if other person doesn't.

For a cosigner to keep his or her credit in good shape, the person who is driving around in that new car will need to keep paying on the loan. If he or she won't, or can't, make the payments, you will need to step in and make them to keep your credit from being ruined. Are you ready to watch someone else sail around in a nice new car while you struggle with covering payments for their car and for your own vehicles?

Once you really think about everything that is involved in cosigning a car loan, you'll probably come to the conclusion that it isn't a sensible financial move. Now, you just have to decide if you are willing to say no to the family member or friend that is asking you to help him or her buy the car. 

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