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When to Cosign for an Auto Loan (And When Not To)

Applying as a cosigner for a primary applicant involves risks that could impact your credit score. If you decide to cosign, make sure you know what it means to your financial situation.

A cosigner is a person who agrees to pay a borrower’s debt if the primary applicant defaults on a loan. Cosigners are a great option for someone who has no or low credit to increase their chances of getting approved for a loan. You may have been asked by a close friend or family member to be cosigner for a loan that they’ve applied for. Mortgages, student loans and auto loans are all examples of credit that are hard to obtain without a lengthy credit history or a good credit score. Typically, when a person is asked to be a cosigner it’s because they have good credit standing, which can impact the interest rate and overall payments of a loan.

If you’ve been asked by someone to be a cosigner, it’s important not to jump to conclusions – cosigning doesn’t always end badly. In fact, it’s a great way to help someone you love reestablish credit and progress financially. However, weighing the pros and cons of cosigning a loan regarding your personal financial situation is crucial before you agree to cosign or not. Keep these tips in mind before you cosign a loan.

READ MORE: Getting a Car Loan Without a Cosigner in Canada

1. Trust is Crucial

Before anything, you must be able to trust the person that you’re cosigning for. Emotions and relationship status aside, if the primary applicant has a history of defaulting on loans or lacks the confidence or income to repay the loan, it might not be a good idea to cosign for them. However, if you’re cosigning for someone who you can genuinely trust and know that they earn enough to make monthly payments, cosigning is a great way to help them rebuild credit and start fresh.

2. Know Your Role as Cosigner

Deciding whether to cosign for a loan or not can be challenging. Thankfully, understanding what the exact role of a cosigner entails can help make the decision easier. There are definite benefits of being a cosigner. Not only will cosigning help the applicant obtain financing, but it will also help them build credit. For someone who has less than perfect credit, applying with a cosigner who is willing to help presents an opportunity for the primary applicant to establish credit. Cosigning is helping someone who has no, or low credit build a better financial status, and cosigners are taken very seriously by creditors.

READ MORE: How to Get a Car Loan with Bad Credit in Canada

Once you consent to be a cosigner and sign the documents, the loan belongs to you just as much as the primary applicant. Some people might assume that cosigning for a loan will only last the first few months, however a cosigner is tied to the loan for the duration of the term. In some situations, a creditor will allow a cosigner to be removed if the applicant has proven a strong ability to pay back the loan in a timely matter. It’s also possible to get out of the loan as a cosigner if the primary applicant decides to refinance the loan. However, it’s never a good idea to cosign a loan unless you can commit to the full length. It’s also important to keep in mind that if the primary applicant does default and you’re left with the loan payments, her or she will still possess whatever the loan was used for. In the case of an auto loan, the primary applicant will still be driving the car, even if you need to make a monthly payment. The role of a cosigner doesn’t stop once documents are signed. It’s your job to keep track of the monthly payments too. If the primary applicant doesn’t make a monthly payment, it’s your job as a cosigner to know immediately and pay up-front for the monthly balance. Otherwise, your credit could seriously suffer.

3. Consider Your Credit

When you agree to cosign a loan, you’re doing an applicant a huge favour. However, if the person defaults on the loan, your personal credit will suffer. A person’s debt-to-income ratio will increase when they are granted a loan, which is also the case for a cosigner. As the loan technically belongs to both the primary applicant and the cosigner, the debt will show on both credit reports. On a credit report, the amount of debt that you owe takes up 30% of the overall score. The more debt that you have, the lower your score. Considering this, signing as a cosigner will most likely lower your score, which might not be appealing as the asset doesn’t technically belong to you. Additionally, a lower credit score might mean that you’ll have a more difficult time getting approved for future loans. If you have a great credit score, solid income and no plans to apply for credit in the near future, signing as a cosigner won’t do any major harm to your credit score.

READ MORE: 5 Factors That Impact Your Credit Score in Canada

Before you agree to sign as a cosigner for a loan, ensure that you’re aware of the risks involved. Don’t forget that your personal finances and credit are just as important as the primary applicant’s. If you can trust the person and fully understand your role as a cosigner, there’s a good chance the duration of the loan you’ve cosigned will be smooth sailing.

Canada Drives can help Canadians all over the country get approved for affordable financing regardless of their credit score. Visit Canada Drives to get pre-approved today.

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