There are many car loan cosigning considerations.  Let’s visit The Money Skinny™ time capsule for a car loan example.  My mother cosigned a Datsun hatchback car loan for me when I graduated from college.  I stumbled through the paperwork.  Not understanding her commitment.  My math was loan docs + mother signature = car keys.  It was more complex than that.  She was guaranteeing debt repayment.  She had to make any payments I missed.  Additionally, that car loan sat on both our credit reports.  Recall The Money Skinny™ mission is to save you time and money.  Let’s delve into car loan cosigning to understand this type of transaction.

Car Loan Cosigning Responsibilities

A car loan cosigner has the same financial responsibility as the borrower.  The cosigner is guaranteeing repayment.  Obligated to pay missed payments.  Monthly payment and amount owed are on the borrower and cosigner credit reports.  A collection agency can pursue both parties.  Who drives the car or where the car is parked doesn’t matter.  A cosigner bridges the gap between the lender’s requirements and the borrower’s credit history.  The Consumer Financial Protection Bureau details car loan cosigning responsibilities.

Car Loan Debt

A car loan is secured debt.  Secured debt is backed by collateral or an asset.  If the borrower defaults, the lender can repossess the car.  The lender has a lien against the title.  Similar to a mortgage lender having a lien against a house.  Student loans are unsecured debt.  A lender can’t repossess tuition or education.  More information is available at the Federal Trade Commission.

Asking for a loan cosigner:

• Can you afford the payments?
• Outline transaction details. Explain repayment plan.
• You are using the cosigner’s good credit history.  It’s a big ask.
• Don’t get huffy if declined.  Find a different solution.

Becoming a loan cosigner:

• Can you afford the payments?
• You are financially tied to the purchaser.  Guaranteeing repayment.
• Cosigning may impact your ability to get other credit.
• Impact on your relationship.

Car Loan Cosigning Protections

Protect the cosigner by including two items in the contract.  Firstly, notify the cosigner of missed payments.  This alerts the cosigner of a problem.  It helps the lender when the cosigner prompts payment from the borrower.  Secondly, limit cosigner liability to the principal balance.  The cosigner won’t pay collection and other fees if the deal goes sideways.  The lender may not agree but it’s worth asking.

20/4/10 Rule

The 20/4/10 rule is 20% down, 4 years of payments, and payment plus insurance equals 10% of gross monthly income.  That’s what you can afford.  Want to stretch the payments past four years?  Don’t.  You risk owing far more than the car is worth.  Spending too much on a car means risking other goals like college or retirement.

Other options

Buy a used car.  Reduce the amount borrowed.  Lower the risk.  A cheaper car reduces the obligation.  A smaller loan is easier to repay.  How about a simple personal loan for the down payment?  Loaning down payment money limits liability.  Additionally, a personal loan doesn’t appear on a credit report.

Don’t Forget Insurance

You must have full coverage car insurance with a car loan.  It protects the lender.  No loan?  You choose the insurance level.  Dropping comprehensive coverage to just liability saves money.  However, liability insurance does not pay for damages to your car.

• A car loan cosigner has the same financial responsibility as the borrower.
• Add cosigning protections to the contract.
• Reduce the amount borrowed and/or the loan timeframe to lower risk.
• A simple personal loan for the down payment limits liability.