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Co-Signing a Car Loan? Here are 3 Reasons For and Against It

Posted by Auto Loan Solutions

For some, getting a car loan approval is a vicious cycle. They need a car to drive the distance required to work a job that theyFor those who experience car loan rejection, co-signing can seem like a way out. desperately need, but face car loan denial because of their credit. As a result, they can’t get the job that will help them get out of debt and slowly improve their credit. So what can they do? This dilemma which is now so commonplace has led to the trend of cosigning for a car. If you’re having trouble getting approved for a loan or are thinking of signing for someone else, you may have to considered this move as an option. But there are both good and bad sides to look at.

A Quick Look at Co-signing

Co-signing on a car loan is controversial since many see it as a risky practice.Co-signing for a loan is precisely what its name suggests: it involves a second party who has better credit than you (typically a family member) signing on your behalf to make your approval more likely. If the name of a person attached to the loan has good credit, then a lender will feel more secure in approving the loan. It’s the financial equivalent of helping someone carry a weight they couldn’t handle on their own. That brings out an important point.

You can compare this to two individuals caught up in the balancing act of lifting a sofa up a flight of stairs. As long as both lifters work in harmony, applying equal effort and moving in the right angles, they will most likely carry the sofa up those stairs without any problems. However, if one person finds him or herself in an awkward position, they could throw off the other individual who may have more strength or better lifting technique than them. Dropping the sofa could easily lead to some damage or injure the individuals lifting the furniture. The same is true when it comes to co-signing (which we’ll discuss later). It’s not necessarily a good or bad move, as long as those involved are aware of both positive and negative aspects of having a co-signer.

The Upsides

Providing both signees are on the same page, there some advantages that come with co-signing.

1. Pushes through the approval barrier

The most obvious benefit of co-signing is the opportunity for a person with bad credit to have a shot at securing a car loan. And in many cases, it happens. Getting approved can lift the burdens off of one’s shoulders if they need a car to meet the demands of their lifestyle.

2. Reduction in interest rates

Although many people with poor credit do get approved for car loans, the rates they pay are higher and sometimes overwhelming. Having an individual with better credit attached to their loan will more than likely open them up to lower interest rates.

3. Can improve credit for both people

There are better ways for people to improve their credit, but a cosigned loan can improve the credit scores of both signers. For the person with bad credit, a cosign can provide them with a springboard that gives them the chance to establish good payment habits, allowing them to improve their score. For the co-signer, this loan can give them the momentum to keep their credit score high. Generally, improvements for a co-signer’s score will be modest but still evident.

The Downsides

Although the benefits are real, one can’t ignore the risks. The disadvantages of co-signing can be damaging, especially if the individual with poor credit is too unstable financially.

1. The co-signer assumes responsibility

Since the co-signer’s name is on the loan, there’s a good chance that they’ll have to bear more of the burdens. This is certainly true if the other party is struggling to make payments. It can be a hassle for the co-signer since they too will already have their own financial commitments.

2. The  co-signer may be at the mercy of the person they signed for

It comes as a huge relief and badge of honor when a co-signer agrees to help a family member with bad credit. But if that family member takes advantage of their co-signer, failing to pay their loan on time (which unfortunately happens), the spouse, parent or sibling who has signed for them has to share the consequences of their poor payment habits.

3. Relationships can go sour

It has been said that the love of money is the root of all evil. That may be a topic worth debating, but financial commitments can surely lead to family members butting heads. For example, the individual who needed help can irritate the family member who co-signed their loan if payments aren’t regular or timely. These issues are often contributors to rifts and outright fights between family members.

If You Need a Co-signer…

From the points listed above, you might realize that having someone co-sign your loan carries more advantage for you, and Question your level of trust for the person you plan on co-signing for.more risks for them. You should take every step to improve your credit, but you should have sympathy for the person assisting you. Paying your loan on time is YOUR responsibility, not theirs – the reason they signed on for you was to simply help you get past an obstacle. For the sake of trust, reliability and your relationship with that individual, do your utmost to make loan payments consistent and timely.

If You Are the Co-signer…

If you are the co-signer, kudos to you. It’s a noble act on your part, and you can certainly change the life of the other individual for good. However, beware of who that person is. Co-signing a loan carries little reward for you and is actually a liability. Considering the fact that you assume responsibility if that person can’t make payments, you have to ask yourself if the person you will sign for is 100% trustworthy. If you have the slightest hint of doubt, don’t sign! It doesn’t matter how close you are to that person. You don’t want to add the financial burdens of others onto your plate if it’s unnecessary.

The Power of Two

Like all financial transactions, there are pros and cons that come with co-signing. Opinions vary considerably. You may hear a lot of chatter about how risky co-signing is, perhaps from friends and family members who have heard “nightmare” stories about relationships going bad for them. However, co-signing isn’t at all a terrible decision. Rather, it’s a choice that requires good judgement from both parties (especially the co-signer), and complete honesty between the person needing help and the one offering it. Now that you know the good and bad sides of co-signing, it’s worth examining what factors should determine whether you co-sign a loan or not. We’ll discuss this in an upcoming post.