Cosigning a car loan involves certain dangers.
1) Degraded Credit Rating
A good credit score requires a fair amount of work. When you cosign an auto loan, any form of delay or nonpayment will be reflected on your credit report. Your credit score could decrease if the primary borrower is unable to make payments. Additionally, your debt-to-income ratio increases when you cosign a loan. Ideally, the ratio of debt to income should not exceed 36 percent. Being a cosigner raises your debt-to-income ratio. Additionally, your credit score declines as your debt level rises. Reconsider your decision if the borrower has a poor credit history.
2) Enforceable Legal Judgments
The lender may take legal action against the cosigner if the primary borrower is unable to repay the loan. In addition, there is a high likelihood that you will be sued prior to the primary borrower. Because you are likely to repay the loan quickly so as to preserve your credit rating. In the event that the primary borrower is unable to repay the loan, the lender has the right to seize the cosigner's assets and income.
3) Decreased Credit Capacity
Other lenders view you as someone who has already agreed to guarantee a loan when you cosign. Lenders assume you are already making monthly payments on the cosigned loan, leaving you with little money to make payments on a new loan. Thus, approval for a new auto loan may become difficult for you.
Does it make sense to cosign a loan?
Cosigning may not be a prudent financial decision, but you can agree to it if you are in a position to afford the risk. Consider it if you have a substantial amount of extra cash or substantial assets to repay the loan amount of the primary borrower. Additionally, if you plan to use the vehicle, it makes sense to say yes.
Cosigning a car loan may appear to be a lucrative way to increase your credit score. However, it can be all risk and no reward if you have to deal with a damaged credit score, legal judgments that are enforceable, and diminished credit capacity."""