Being a co-signer is a big responsibility, and it can be a big risk to your credit too. If a payment is missed, it can damage both parties credit.
You might have already been asked to help a friend or family member who needed help with an auto loan so as to avoid financing a car with bad credit. If you've already chosen to co-sign, you need to make sure you are aware of how your credit is tied to the loan. One of the biggest concerns is how a missed payment can cause your credit score to be damaged.
What If They Miss a Payment? What Next?
When you decide to co-sign on someone's loan, you are taking responsibility for it if at any time the payment is not made. If a late payment stretches beyond 30 days, or worse yet 60 or 90 days, it can have a negative effect on your credit as well.
You certainly do not hope or expect the primary buyer to default or miss a loan payment. However, it can happen. You need to know that this can cause big issues for you, the co-buyer, and monitor accordingly that payments are being made promptly on time, and in full. Here are a couple of other things to keep in mind:
- Simply being a day or two late will not ding your credit. It will however cost you late fees that will need to be paid before the late payment does affect your credit.
- A 30 day or more late car payment will damage your credit, though a single missed payment will only cause temporary harm. However repeated late payments, or payments that start to exceed 60 days can quickly eat into your credit score.
- Whoever has the highest credit score has the most to lose. Even though you both are equally responsible for ensuring the payments are made, the person who holds the higher score is liable to take the biggest hit due to late payments. Even if they don't drive the car.
- A collection agency is just as happy to run you down as they are whoever is driving the car. To avoid the worst, check in for yourself that the account is current every 30 days, 60 at the most.
As We See It
Even though you're not the one making the purchase, you should always budget an emergency fund into your plans. This way, if you do have any unexpected costs you can cover them without putting yourself into a pinch. If you haven't co-signed yet, be careful and consider all the risks of cosigning a car loan. It's a good idea to talk at length with both the buyer and the lender to understand fully what is expected of you in the event of a default. Don't feel bad for asking questions, after all this affects you just as much as the buyer.
And remember, just because your friend or family member has bad credit doesn't mean they don't have options without you. At Auto Credit Express, we've been helping people with poor credit get auto loans for over 25 years. If you know someone who doesn't know how to handle an auto loan with bad credit, tell them to fill our commitment free online auto loan application and we can show them the ropes without getting your credit rating involved.