If you’re considering cosigning on an auto loan for your teenager, there are a few risks to keep in mind. There are also potential benefits, but depending on your financial situation and credit score, the cons may outweigh the pros.
Considerations for Parents and Teens
An 18-year-old with no credit may have issues getting a car loan by themselves because of the high risk to lenders. A solution for some families is to cosign their teen’s loan, so they can start building credit and get a decent vehicle for their high school or college years.
Cosigning can be a great way to help your teen in the future, since they can start their adult lives with credit history, which helps them be financially independent later in life. You could finance a car for them, but if their name isn’t on the contract, then they wouldn’t be building credit.
At the same time, there are a few things you should know before picking up the pen and cosigning an auto loan.
Risks and Benefits of Cosigning for Your Teen
A cosigner is someone who “lends” the primary borrower their good credit score, and agrees to make payments on the loan if the primary borrower is unable to do so, themselves. As a cosigner, you should have room in your budget in case this happens, and be comfortable with your financial situation.
If you decide to cosign, the loan becomes your responsibility if your teen fails to make payments. This also means that your credit can either be positively or negatively affected, depending on how your teen handles the loan. If they’re making on-time payments, this could help both your credit scores.
Keep in mind, cosigning could affect your ability to take out credit for your own personal needs, so you should plan accordingly. Cosigning makes this more difficult because the loan is added to your credit reports, and future lenders will factor it into their decision when you apply for other types of credit. Just be aware how cosigning can play a role if you plan on financing any large purchases.
Can You Afford to Cosign?
If you decide to cosign for your teen, you must both meet the lender’s requirements, including debt to income (DTI) and payment to income (PTI) ratios. Another thing to keep in mind, although this is usually not an issue, is that you should have a higher credit score and more of an income than your teen, which increases the chances of approval for the loan.
Whenever you cosign, you’re taking on a risk. Take precautions by putting together a budget that includes the car loan payment. If you cannot afford the payment, cosigning may not be the right route.
The Bottom Line
If you have good credit, a reliable income, and enough room in your budget, cosigning could be a great way to help your teen establish credit with the bonus that you both could end up with better credit scores. But if you’re hesitant about your teen’s ability to make payments on time, or you aren’t financially comfortable enough to take on the loan payments if necessary, you might want to explore other options.
In fact, there are other choices for families with limited or poor credit. At Auto Credit Express, we can connect you with a local dealership that's willing to work with unique credit situations. Fill out our free, no-obligation auto loan request form, and drive your way to better credit today!