My son needs a car for his daily commute. Is it wise to cosign a car loan for my son? Will it affect my credit score? – A Doting Father
Are you someone like Doting Father? Are you thinking about cosigning a loan for your son, daughter, brother, cousin or any other member of the family? You are not alone. Approximately 1 in 6 U.S. adults have cosigned a mortgage, loan, credit card or more. According to a poll by CreditCards.com, car loans accounted for a major chunk of total cosigning in USA. 51 percent of respondents have cosigned a car loan to a family member or a friend. A majority of parents will cosign for their children so that they can qualify for a loan.
For many car buyers, cosigning is the difference between buying a car and facing loan rejection. Having a cosigner can ensure quick auto loan approval and it can lower the cost of the loan for your son. However, it can be a risky proposition for your financial health. In order to make a well-thought decision, please ask yourself the following questions before you sign on the dotted line.
1. Why is your Son unable to get a Car Loan on his own?
If your son is young and doesn’t have a credit history, it is obvious that you want to help him get a car loan and build a credit score. Helping your college-going kid secure a car loan can inculcate the right financial values in him. If your son has a full-time job and still cannot find an auto loan on his own, it is time to dig deeper. Learn why his credit report is bad. If he has been a victim of identity theft, it is understandable. But if he has missed a few payments in the past and has a history of making dubious financial decisions, consider them red flags.
2. Are you ready for the Financial Responsibility?
28 percent of the total 2003 poll respondents saw a decline in their credit score. Cosigning a car loan or any other loan/mortgage puts a big responsibility on your shoulders. 38 percent of cosigners had to pay a part of the loan or the total amount because the primary borrower couldn’t repay the loan. From the numbers, we can infer that when you open doors for someone (and cosign his loan), you may be left out in the open.
If you want to cosign for your son, make sure you can take over the debt in case he fails to make payments. You can work with your financial planner and make contingency plans to absorb the debt, if and when the situation arises. If the numbers say you cannot manage the payments, it is best to avoid it.
3. What are the Risks of being a Cosigner for Someone Else?
The explicit risk is to your credit score and financial stability however there are many hidden risks that you should be wary of. If you are going to apply for a loan in the near future, cosigning can impact your debt-to-income ratio and keep you from buying your dream retirement home, car, holiday or anything else. Becoming a cosigner means assuming 100 percent responsibility for your son’s car loan. It will affect your credit worthiness and make borrowing money harder for you.
Your credit score will be tied to your son’s financial habits as long as the loan term continues. If he doesn’t make a payment, it is your credit score that will be affected. When you want to help your child in getting a car loan, monitor the loan closely. Ensure he makes regular payments by checking the monthly statements on a regular basis.
4. Is there a way out?
If you do not want to be a cosigner, that’s okay. If you are not comfortable putting your financial well-being on the line, it is fine because there are many other options other than being a cosigner. If the goal is to help your son buy a car, you can seek no cosigner car loans. You will find many online auto financing companies that offer auto loan without a cosigner. There is a special first-time car buyers’ program designed for college students who want to buy a car on their own.
You can choose a reliable auto financing company that will enable your son to get a car loan without familial help. You can also make a down payment on his behalf and help him buy a car without putting your credit score in danger.
Cosigning a car loan is definitely a way of helping your son buy a car but remember it can take a toll on your financial health. Make a decision after understanding the different solutions available to you.
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