Co-sign Auto Loan - A Good or Bad Thing to do?

[tropknight808]

I'm looking to helping my daughter out by possibly refinancing and co-signing on a car loan.

My daughter purchased a used car about 2 years ago and had it financed at an interest rate of over 16%.  When she and her then-husband (now ex-husband, thank goodness) made any credit purchase, he made her put the loans under her name because his credit was bad.  The vehicle loan payments were to be paid by both of their incomes.  Well, he's no longer in the picture (thank goodness, again), but she's having a hard time making the payments, and in fact has been late a few times.  I wanted to see if I could help her by refinancing the loan with me as a co-signer and hopefully lower her payments.  My credit is okay (FICO at 712).

I do have one other vehicle loan on the books, which I've had for about 2 years.  No lates.

Question 1:  Is trying to get a loan at a lower rate an option, if I co-sign?

Question 2:  If I do co-sign, what are the good and bad about co-signing an auto loan that I should be aware of, i.e. how much of a hit will my credit take?  I don't foresee needing any new credit in the near future.

[Anonymous]

1) Quite possibly the rate would go down, and the payments reduced, depending on how long the term for the loan will be. Refinancing for a whole new (say) 5 years, or just the remaining (say) 3 years. It may not go down much. They may have to refigure it and place you as "Number One" and her as "Number Two" on the loan. It would be a guess, I have no idea if it would drop to 5%, or just down to 12%. The fact would be she would still be on the loan, and they'll get you for that.

My husband purchased a car in 2008, credit scores were around 650. He had two auto loans in the 5 years prior with bad history (a long, long, long string of consistent 60 day lates), but qualified for a 6.5% rate from DCU. When we purchased my Trailblazer last month, I have poor history, but perfect auto history, and that brought my Auto Enh. Score to 612. Our interest rate is 11.5%. His credit has actually improved to 690 since 2008. I am making him pay for my "other" bads. It's because I am on the loan.

Since you are knowledgable of her current and previous situation, whatever you feel is necessary to help her, by means do so. But please remember to enroll in the online account access, so you can get a reminder a week before the payment is due. Read all the papers to ensure when / if they allow a grace period, that would give you time to pay the monthly payment in case she misses it by forgetfulness or otherwise. Set up your accounts to allow a Direct Pay in advance, in case it is in its grace period you won't have to be verifying bank info at the last second.

Unfortunately, in your interests, you'll most likely take a ding for the inquires, a ding for a new account, and a ding for lowering your AAoA. You'll feel the effects more with your 700+ score. Whereas someone like me would take like a 15 point decrease. I haven't been dinged yet for our new auto loan, we will still see on that.

IMHO, I don't think her interest rate would go down much at all. If you are a member of a credit union with an established relationship, ask them their lending policies and bring in a copy of your credit report and a copy of hers, with her of course, so they can review before actually pulling. Get their idea on the whole interest rate question before beginning the application process. Best of luck to you.

[daisyduke]

I just want to add that you might want to get the value of the car and the remaining amount of the loan - could very well be upside down since even a great deal could turn upside down with 16% interest rate. Maybe instead of a traditional auto loan rate, you might be better off getting a loc with a low interest rate.  Just some food for thought. Good luck to you and your daughter.

[marty56]

My options would be:

1.  Sell the car.

2.  Co-sigining is a bad deal and a sure fire way to destroy a relationship.  If you do decide to however, you should have the statements go you your address and you make the payments.  You also need to make sure you can make the monthly payment in full or you will sell the car/take the keys in case your daughter cannot give you the money.

[MarineVietVet]

I know you love your daughter and want to help her but as marty56 said: Co-sigining is a bad deal and a sure fire way to destroy a relationship.

From a BK years ago to:
9/09 EX pulled by lender 802
3/10 EQ- 800
4/10 TU -772

You can do the same thing with hard work

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[Anonymous]

tropknight808-

My thoughts:

We all want the best for our kids, yet at what price?  At this juncture of your life, is it worth the risk?  And can you withstand the expense of your daughter potentially regressing in her personal responsibilities, thus financially relying on her parent(s), as if she was an at-home minor again?  These are difficult times for many folks, and it requires smart and tough choices.  I say it’s time for some tough love by saying no for you to be a co-signer. 

In doing so, it builds character and strength in the both of you while reaffirming boundaries and eventually building a stronger family bond and respect for others.  In multiple ways, these are teachable and learning moments for the both of you.  I would optimize the opportunity by collaborating with your daughter to explore and secure alternative solutions. 

Otherwise, you need to be 100% financially, mentally, and physically prepared to accept responsibility, if your daughter would not keep her end of the agreement.  If she gets away with missing one payment, I’m betting it will lead to more missed payments. 

Secondly, if she falters at making timely payments, who is to say that it won’t eventually devolve into allowing routine maintenance to slide and or the inability of her paying insurance premiums. 

Protecting the value of the asset is paramount, especially so if things warranted the need to sell the car.  If it isn’t properly taken care on a regular basis then there goes the resale value.  Then what?  You could end up being in deeper than you imagined.  And if it comes to it, how would you command possession of the vehicle to financially protect yourself?  Potentially it could devolve into her needing money for fuel too, or perhaps money for personal habits and other living expenses.

Accidents, fires, health emergencies, home maintenance, and even death – no one knows when they will occur.  And what if these challenging economic times worsen, or for whatever reason she has a reduction of work hours or loses her job, and or you lose some part of your income?  And if a personal crisis or catastrophic event occurs, would you be in a position to sustain the storm or, if needed, would you have the capacity to quickly obtain credit at a financial institution?

My point is to consider the entire landscape and think things out.  Ultimately leave yourself an out should something bizarre happen rather than boxing yourself in.  Otherwise, once you commit it could be like opening a can of worms that may deteriorate into an open ended scenario.  Going back won’t be easy.  It’s a slippery slope.

Good luck.