The Risks of Cosigned Car Loans

Opting for a cosigned car loan can make your loan less expensive even if you have a bad credit score. You are essentially borrowing the good credit of your cosigner in order to make your application more appealing to lenders. The cosigner is agreeing to be held accountable, financially and legally, for the repercussions that would occur if you defaulted on the loan or even missed a payment. This shared liability is just one of the risks of cosigned car loan. 

Shared Risk

The biggest risk when you use a cosigned car loan is you are sharing the risk of the loan with another person. That person must be willing to accept any and all liability for the loan. If you make a late payment, that activity may appear on the other person's credit report.

However, credit risk is a two way street because the co-signor's credit can also affect your loan. For example, when you use a cosigner, if that cosigner's credit score takes a hit, your rates could adjust and be higher with adjustable rate loans, or ARM loans. Essentially, any time you are working with a cosigner, your actions and their actions will be intertwined for the life of the loan. It is best to use a spouse or family member for this reason. This will give you some assurance personal dispute will not threaten the loan.

Mitigated Reward

The second risk of cosigning on a car loan is you will not see your credit score improve as quickly in response to healthy activity. When you make your payments each month or even pay off the loan, your score will not go up as much as if you had obtained the loan yourself. Furthermore, if you use cosigners on all of your loans instead of obtaining independent loans, you essentially have no credit whatsoever. Young people fall into this trap when they try to make their first financed purchase. They assume they have good credit because they have held other loans with cosigners. This is not the case, it is important to have independent loans as well. 

Strict Loan Terms

Lenders may see your loan as one that threatens modification in the future. This means they believe you will attempt to refinance or otherwise change the terms of you loan. Many borrowers with cosigners do this once they have enough credit to secure a loan for themselves. They will seek a new loan and pay off the existing car loan in one lump sum. Lenders do not like when loans are modified because it generally means they are making less than they expected on the loan over its lifetime. As a result, they will build in terms that preclude you from refinancing without paying large fees and penalties. These terms will be much more restrictive on a cosigned loan, making it essentially useless for you to refinance in the future.

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