Dear Dr. Don,
My boyfriend needs a new car. The car dealer’s finance guy says his credit isn’t good enough to get a loan without a cosigner. He wants me to cosign the loan for him. I want to help him out but, I’m not sure it’s the right thing to do. What do you think?
When you cosign a loan you’re taking on a credit risk that a professional lender has declined to accept. It’s common for cosigners think they’ll never have to make a payment. It’s also fairly common for the cosigner to later regret making this decision even if they don’t wind up making payments, because of how it limits their ability to get approved for credit for the things they want to purchase. Cosigning for boyfriends/girlfriends gets especially tricky if he or she moves on to another relationship – taking the car and potentially sticking you with the payments.
According to the FTC publication, Co-signing a Loan, when cosigned loans go into default, as many as three out of four cosigners are asked to repay the loan. Laws vary by state, but in most states when the primary borrower misses a payment, the lender can immediately attempt to collect from the cosigner without pursuing the primary borrower first.
If, after reading all this, you still want to help out your boyfriend by cosigning his car loan, I’d make sure the either the lender or your boyfriend provide you with copies of the loan contract and other related documents. Ask the lender to receive a copy of the monthly statement, and any late payment notices, or online access to the account for electronic payments. I’d also suggest that you be listed on the title of the car as a co-owner. The car can be retitled when the loan is paid off.
The FTC publication also provided a great tip. Ask the lender to include a statement in the loan contract that states: “The cosigner will be responsible only for the principal balance on this loan at the time of default.” You’re looking to avoid late charges, court costs, and attorney’s fees piling up on your financial guarantee.
You can shop lenders without taking multiple dings to your credit report if you do the loan applications within a short period of time, say 2-4 weeks. The credit scoring model recognizes that you’re comparison shopping and it only counts as a single credit inquiry on your credit score. Your boyfriend may have better luck with his credit union than with the finance manager at the car dealership.