That said, it might be better to be a co-owner of the car and apply for the loan jointly. In some cases, you may just want to help somebody else. Co-signing can pose substantial risks, but you may be willing to take those risks.
Sometimes things work out fine, especially when you are co-signing for someone whose financial situation you know and trust. However, you still need to be prepared for things to go badly. Before you co-sign, evaluate the alternatives. There are other choices for sharing some of the burden of a loan that can keep everybody's finances safe and secure.
Instead of co-signing so that lenders approve your borrower, help out with a down payment instead. A bigger down payment could result in lower required monthly payments —making it easier for the borrower to qualify with limited income.
For this option, you need to:. Check with a CPA and attorney to identify and avoid any potential issues. If you are helping with a down payment, some lenders may require you to submit a "gift letter," which states that the amount you are contributing doesn't need to be repaid. You can lend the money yourself if the borrower can't otherwise get approved and you don't want to co-sign.
This is called a private loan , where you are the bank. If you go with the option, be sure that you:. There are downsides to private loans, however. Loaning money between family and friends can make personal relationships awkward, especially if the borrower has trouble repaying.
Private loans can also make it difficult for the borrower to build credit unless you report payments to credit bureaus. If you decide that co-signing makes sense for you, manage the risks to protect yourself and your relationship.
Don't be surprised if you have to pay: many co-signers end up repaying all or part of a loan. Consumer Financial Protection Bureau. Federal Trade Commission. Consumer Action. Accessed Nov. Actively scan device characteristics for identification. When a friend or relative asks you to cosign a loan, your first instinct may be to agree and help them out of a tight financial spot. Whatever you cosign will show up on your credit report as if the loan is yours, which, depending on your credit history, may impact your credit scores.
Make sure you both understand what is required of you as the cosigner, and together weigh the pros and cons of this action on your relationship. Our experts have been helping you master your money for over four decades. Bankrate follows a strict editorial policy , so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.
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A co-signer is someone who agrees to repay your debt if you default on a loan or miss a payment. The potential downside of getting a personal loan with a co-signer is that you can damage their credit if you miss a payment or default. Before you ask someone to co-sign, inform them of the risks and make sure they understand their rights as a co-signer. A co-signer could be a trusted friend, a family member or anyone close to you who has a strong credit score and a consistent income.
Co-signers are common in cases when the borrower is struggling to get approved for a loan based on their credit score, income or existing debt. A co-signer has no impact on your credit. Whether you use a co-signer to take out a personal loan or get one on your own, it will have the same initial impact on your credit.
A lender will perform a hard credit check, and this will ding your credit score by up to five points. Co-signing a loan may also affect your ability to obtain loans for yourself because you have taken on the obligation to pay the loan. Lenders ask for a co-signer when they do not want to take on the full risk of loaning money to that particular borrower.
Read the terms of the loan and consider carefully whether you wish to take the risk of co-signing. Searches are limited to 50 characters. Please do not share any personally identifiable information PII , including, but not limited to: your name, address, phone number, email address, Social Security number, account information, or any other information of a sensitive nature.
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