Should I cosign on a car loan?

The Dangers and Considerations of Co-Signing an Auto Loan

In this episode of Women Buying Cars, Meredith Reynolds of Reynolds Automotive discusses the risks and considerations associated with co-signing auto loans. She emphasizes the importance of avoiding co-signing in most situations, explains why individuals may need a co-signer, and highlights the potential negative impacts on one's credit. Meredith shares a personal success story of co-signing and outlines the specific case where co-signing for your 18 to 25-year-old child can be beneficial. Additionally, the episode includes a segment on adaptive cruise control technology, offering insights into its features and user experiences.

00:00 Introduction to Co-Signing on Auto Loans
02:49 Why People Need Co-Signers
06:05 Risks of Co-Signing
08:39 Exploring Adaptive Cruise Control
13:17 When It's Okay to Co-Sign
15:17 Co-Signing for Your Kids
18:44 Final Thoughts on Co-Signing
21:10 Conclusion and Call to Action

This episode is for you if you have ever asked, "Why does someone need a cosigner?" "Will I need a cosigner?" "Should I cosign for my friend?" "Should I cosign for my boyfriend?" "What are my responsibilities as a cosigner?" "What is adaptive cruise control?" 

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Transcript

0:02

If someone asks you to co-sign on an auto loan for them, there is one situation I highly suggest you do that. There's a sprinkling of situations that I suggest you proceed with extreme caution, and there are many and most situations where I suggest you absolutely do not do it. We will discuss those three situations today on women buying cars. Welcome back to Women Buying Cars. Thank you so much for joining me. I'm Meredith Reynolds and I co-own Reynolds Automotive in Merriam, Kansas, a suburb of Kansas City. We are a used car dealership. and I am here to help inform you on how to be smart buying your next car. I received my bachelor's degree in journalism, and one of the things we learn in journalism school is do not bury the lead. In other words, don't put the most important thing at the very end where a lot of people will tune out and not get to it. Put the very most important thing at the front, and that's what I'm doing right now. I am telling you, in the majority of situations, if you are asked to co-sign on a loan for someone. Do not do it if this is a friend who's down on their luck. If this is, a member of your extended family, sit down and brainstorm with that person on other ways they can get the car that they need instead of just agreeing to cosign for them. A co-signer is someone who is agreeing to be responsible for that car payment. If the primary owner doesn't pay for it, when you co-sign, you are equally responsible with the person who's buying it if they're the one buying it, it is assumed that they will be the one paying for it. But if they don't, it is all on you. And that's why you need to be really careful when considering co-signing for someone. It is generally a very bad idea. I have seen many people end up in a situation where they can't buy a car for themselves because they have co-signed for someone. So now that I've told you the lead, let's break down some of these situations. Why would someone need a co-signer? Why would someone be coming to you asking you to co-sign? One reason is they have not established any credit. They essentially don't have a credit score. That can happen if you are new to this country. If you are very young or if you have spent. Decades allowing your spouse to put everything in his or her name, and you have nothing in your name. I've seen this happen too, where we have 50 or 60-year-old widow. She comes in to buy a car and she has zero credit history because her husband did all of that. Put the house in his name, put the cars in his name, and she has nothing. And now when she needs to buy a car. She's having a hard time doing that because she has no credit history. Why does it matter if you have credit history? I have an episode that talks a lot about credit scores. It is episode four, and so if you need a lot of information on credit scores, how to raise your credit score, what a credit score is, please go back and listen to that episode. Your credit history tells the bank how much of a risk it will be for them to loan you money. If someone doesn't have credit history, they're a risk because it's a lot of unknown. Second, someone will need a co-signer if they have poor credit, meaning below 600, maybe even below six 50, because to have a score that low, there have been bills that have not been paid on time or at all. Again, huge red flag to a lender who's you're asking maybe 20,000 or more dollars from. So they're going to want a co-signer because remember, a co-signer is saying, if this person doesn't pay for the car, I will pay for it. They want someone with you on the loan that they know will end up paying for this car if necessary. Another reason someone might need a co-signer is maybe their credit's decent, but they have a very high debt to income ratio. Again, this is talked about in episode four if you have a ton of debt or a ton of open credit cards. You can have a high debt to income ratio, meaning how much you make versus how much debt you have. And next you may have a credit score, but if you don't have a long history of credit, that may not be enough. They may require a co-signer if the person trying to get a loan has decent credit but doesn't have a job. The bank doesn't have any confidence that they'll be able to pay their bills, so they're not going to just give them a loan by themselves. In order for someone to be a co-signer, they have to have all of the things I just mentioned in a positive direction, meaning low. Debt to income ratio, a good paying job, job history,, high credit, meaning over 700 auto loans that you have successfully paid off. And enough income where you could make all the payments that you have for yourself, plus the payments on this car if this person doesn't pay. So let's talk about that. What happens when you co-sign on a loan and this person that you're co-signing for is consistently late with their payments or stops making them what will happen to you? It will start showing up on your credit report. You'll be going about your daily life having no idea that your credit is tanking. Late payments affect you. It's not just a lack of payment, but those late payments, that's gonna start dragging down your credit. If they completely stop paying for the car and it gets repossessed, first of all, you are gonna be hounded by debt collectors. And you're gonna have to make a decision. you're either going to start paying for the car so that your credit is saved. Or you're going to let it go to repossession and then your credit is going to really, really tank. That repossession will stay on your credit report for seven years. This is why I'm telling you in most situations, you should not be co-signing for someone. It is way too much of a risk, and it may stop you from being able to get. Your own home or car loan down the road. Even if the person you're co-signing for does an excellent job of paying for it, they're never late. They make every payment. It still could be hard for you to get a loan someday when you need it because your debt to income ratio is now a lot higher. Their car is considered part of your debt, and so it could be a challenge for you to get. A loan of your own. There are lenders who will work with people who have poor or no credit. We have a couple of banks that work with people that have what's called subprime credit, meaning. Well below what it should be, or people who are new to this country, young, et cetera, and don't have any credit in exchange for taking a big risk like that, they're going to charge a high interest rate. They also may not be willing to give that person a very long loan. If someone's coming to you asking you to co-sign, sit down and discuss some of these things. They may need to stop and call around. Try to find car dealers who work with some of these subprime lenders, and maybe it is possible for them to get a loan somewhere else on their own. It won't be great terms, but it will be something just for them. Before we talk about situations where I think it's okay to cosign for someone, we're gonna stop for a new segment called What does this Button Do Today? The button we are talking about is adaptive cruise control, sometimes called automatic cruise control, dynamic cruise control, but typically called adaptive cruise control. I was going to tell you what the button looks like, and then I found out that it varies by company. Usually it involves some horizontal lines in the shape of a triangle that symbolizes the lane that you're driving forward in, and often there's either a car there with that triangle or an arrow. The best thing you can do is Google adaptive cruise control icon four, and then put in the company that made your car, Toyota, Chevy, whatever, an adaptive cruise control. Is what you use in conjunction with regular cruise control. Cruise control, of course, keeps you at a steady speed, but what happens when you come up on someone in front of you? Who's going slower than that? Usually you would have to break, which turns the cruise off, and then get around them, and reset your cruise. What adaptive cruise does is instead, let's say you have your crew set at 70. You come up on someone going 68 once you get within a certain distance, a safe distance, the cruise is going to automatically turn down to 68 so that you are staying with that person at a safe distance and not getting closer to them anymore. Once they exit or move over, then your crews will automatically go back to 70, this seems like a good idea for someone who has a tendency to tailgate. If you're a tailgater, you may not know you are, but maybe every once in a while someone says something to you like your passenger, or you suddenly go, oh, wow, I'm really close to this person. This would be a good feature for you because it keeps you from tailgating. This is a safety issue. If you're not really paying attention, which is a whole other problem, it's going to keep you from coming up too close to someone and potentially running into them, especially if the person in your lane is stopped completely or going extremely slowly because of a problem they're having with their car. This will slow you down before you have time to think about it. Fun fact about adaptive cruise. The technology. That it utilizes was first used by Mitsubishi in 1992. Really, it was used to alert drivers. If there was something in the road, it wouldn't change their speed. This is how it began and it's evolved since then. Mitsubishi named it the Debonair, which I think is hilarious. Since then, it has evolved into different technologies, which we'll talk about another time on. What does this button do? Do I like adaptive cruise? Well, I've used it very little, and when I did use it, I'm honestly not a big fan. Here's why I was using it, cruising along at whatever the speed limit was, let's say 70. And I didn't even realize that it had kicked in and lowered my speed. It was pretty subtle. Then, I don't know how long later, but at some point I realized I was going significantly below the speed limit because the person in front of me was, but again, the slowdown was so subtle I didn't notice, and that's fine. It's not like I was doing something dangerous, but going too slow in traffic can be dangerous. And anyway, I was wasting my time going, say 55 when I could have been going 70, and this was a time when I had a long distance to travel and I really just wanted to get there. So I, I didn't love that. The other thing is, I don't think it's that hard to just pay attention and adjust your speed. Go around people who are slow, safely, et cetera. Probably because I've spent the majority of my life driving without it. So the addition of it is not really doing anything for me personally, and I don't think I'm a tailgater. So again, Google Adaptive Cruise, icon four. Toyota Corolla or whatever you drive. See what it looks like. And now you know what this button does. Let's get back to talking about who, if anyone, you should co-sign for. I told you at the beginning that there were a few situations where I think co-signing could be a possibility, but you need to proceed with extreme caution. I'm gonna use my own history as an example. When I was right out of college, my sister-in-law co-signed on a car loan with me. She knew that I was a very responsible young adult. I was also living with her and my brother at that time, so I was very much there in their sights, under their thumb, and I didn't realize that at the time what a risk she had taken by doing that for me. And thank you, Pam. I'm very grateful. It all worked out. No one's credit was negatively hurt by it. I do think that if you are trying to help an immediate family member that you have a lot of trust in, who has always been someone that you see as responsible financially? And who is in close contact with you, that can be something you can consider. One thing though, after a few years with my new car, I had. A job teaching. I had successfully paid down on that loan, and when my brother and sister-in-law went to refinance their house, they were struggling to do that because of this extra debt that they had by co-signing for me. Their debt to income ratio was too high to get a good. Refinance interest rate. So she called me and said, Hey, I need you to get this loan now only in your name and get us off of the loan. We went ahead and did that. I was able at that time to carry the loan by myself and they were able to then go refinance their home. That is a success story for co-signing. There is one situation that I highly recommend that you co-sign. Not just consider, but do it. And that is for your 18 to 25-year-old kid, your own, and even if you can buy a car for them outright at age 18 so they can safely go off to college. I recommend you finance at least part of it in their name and your name for a couple of reasons from the financial situation, this is helping them establish credit and establish auto loan history. Again, episode four goes into this a lot, and I highly recommend you listen to this if you have a young adult. You are giving them a gift that goes beyond just the gift of a car. If you can help them establish their credit and auto loan history once they turn 18 and before they're out on their own. If you buy the car outright, you're not paying any interest and I understand that. But if you will just finance it or even just part of it. Make sure the payments are being made on time every single month and after a year, have your kid check their credit. For free with no penalties at places like Experian or TransUnion online, very easy. If they are in the seven hundreds plus, then, that's a good time to go ahead and pay the loan off, stop paying interest on it, and then say, there you go. Don't mess it up. Keep your credit high and don't let it drop. If it's not in the seven hundreds yet, maybe it's in the mid to high sixes, I'd probably give it another six months or so. But even then, if you pay it off, at that point, having a paid off loan is going to help their credit as well. The bonuses, it's also boosting your own credit at the same time. Even if you have great credit, it's just another positive for you. if you're going to do this for your 18 to 25-year-old, you have absolutely every right to micromanage that loan, even if they're the one making the payments. You should micromanage that loan because as we said before, your credit is on the line. As a parent and former teacher, I also highly recommend that you have them pay for part of that car. One great way to do it would be to set up automatic payments yourself from your bank account so that you know it's being paid every month, and then require your kid to pay you X amount of dollars on the first of every month so that they have buy-in to keep the car nice so that they feel what it's like to be an adult. And to make bill payments on time every month. I think this is really important from my experience as someone who's worked with young adults in financial situations, and also as someone who just enjoys observing human nature. It's really important that your young adult is feeling some responsibility for this vehicle that you are giving them or that you are helping them get Then when they're 28 and they're going to get a car by themselves, they can. And they will not be needing to find someone to co-sign for them, they will be able to do these things on their own and successfully launch into adulthood. One more thing to think about when being a co-signer is micromanaging insurance. They have to have full coverage with a deductible that's not out of reach because if they totaled the car, if a tree branch fell on it and ruined the car. And you owe more on the car than what it's worth. There will be a difference that will have to be paid, and if they don't pay it, you will. Episode one, gap Insurance talks all about this. If you don't have gap insurance, make sure they have full coverage. They're paying their insurance on time so it's not getting canceled. So that if something happens, the car is covered and therefore you are covered. So it's a lot to think about. Again, co-sign for your kid when they turn 18 or in the first couple years of college, so that they're establishing credit history and they're getting off on the right foot to adulthood. Make them pay for part of the car every month though it comes out of your bank account so that you are in control. Proceed with extreme caution. If, a very close family member comes to you in need of a co-signer, know who you're dealing with and whether or not you can trust them to pay their bills on time, whether they have the capability of doing that, and in other situations, a friend, your. Kid's friend who doesn't have parents in the picture, brainstorm a different way. Help them find a much cheaper car that they can pay out of pocket for, or a buy here pay here loan, where they can get a high interest loan of their own so that they can successfully get a car without help. Or help them fix up a car they currently have or let them know that the car they have works, even though it's not an awesome car. And that's just what they're gonna have to deal with until they can get on their own. And in any of these situations, it's only for people who really need a car and not just people who are wishing they had a new car. people who are just wishing they had a new car, need to work on their credit and job history and wait until they're able to do it on their own, not put it on you. If this episode was helpful to you, please give me a five star review and follow the show. Please share this with someone who needs to understand finances better. Help them out today by teaching them what it means to co-sign and what they're really getting into, or what they're asking someone to risk for them if they're asking people to co-sign for them. If you need help getting a car and you're in the Kansas City area, come see me at Reynolds Automotive. Thanks so much for listening and happy driving.