Help when you can help!
It is true that we must help those who are in need. But, you must remember that you can help others only when you are in a position to help. So, before agreeing to co-sign a car loan contract for a friend, a family member or a colleague, you must understand your financial situation and ascertain whether you are eligible to become a co-signer.
Can I Co-Sign a Car Loan Contract?
Even if you are eager to help someone in buying a car, you should consider the following factors before co-signing a car loan contract:
Credit Score
A good credit score is the pre-requisite for becoming a co-signer. If you have a bad credit score because of late payments, missed payments, bankruptcy, etc., lenders will consider you unfit for becoming a co-signer.
Debt-to-Income Ratio
Debt-to-income (DTI) ratio manifests the percentage of your gross monthly income that goes towards paying debts. A higher ratio ensures the lender that you have money to make payments if the primary borrower (the person whom you are co-signing for) misses them. So, it is very important to have a good DTI ratio for becoming a co-signer.
Future Purchase Plans
If you are thinking of buying a home or a car in the near future, you should not co-sign for a car loan contract. Potential lenders will consider it as your loan and include it in your total debt while calculating debt-to-income (DTI) ratio. It means your DTI ratio will reduce even when you have not actually purchased any new asset. Additionally, it will create a problem for you in opening a new line of credit.
What are the Consequences of Co-signing a Car Loan Contract?
It is a huge financial responsibility to become a co-signer for someone. So, before you make any commitments, it is important to understand the following consequences of co-signing a car loan contract:
Responsibility of a Car Loan Contract
When you co-sign a car loan contract, you become responsible for the loan. If the primary borrower dies, loses his job or doesn’t make payments, you will be required to pay the total loan amount as well as the late payments fees that are charged by the lender.
Responsibility of Regular Payments
It is not mandatory for the lender to contact you and provide information about missed payments. But it is your responsibility to ensure that regular monthly payments are made to the lender.
Impact on Credit Reports
Many individuals ignore the impact that co-signing has on their credit reports. You must remember that the car loan contract will not only be visible on the primary borrower’s credit report, but it will also appear on your credit report. Additionally, if the primary borrower does not make regular payments, it will affect your credit score negatively.
Bottom Line
Do not be in a hurry to help your friend or family member in buying a car. If you make a hasty decision of signing on the dotted line, you will end up ruining your credit score as well as your financial stability. So, understand your financial health and know your responsibilities as a co-signer to make an informed decision.
