Auto Loan Co-Signing Alternative That Keeps Friend
Auto Loan Co-Signing Alternative That Keeps a Friend
How will you react when the dreaded moment arrives when your friend or relative asks you to co-sign a loan for them? They have to have that car. Maybe they need it for transportation to and from work. Maybe they need a minivan to take the children to day care and sports. It’s tough to say no sometimes isn’t it? But what about that sinking feeling you have when you know that this is going to cost you both your friend and your hard earned credit score as well? That feeling we all get when we are put on the spot by a situation where it is difficult to say no. We know deep down inside that this is not going to end well no matter what we do. As shakespeare said in “The Merchant of Venice”…
“Neither a borrower nor a lender be. For loan oft’ loses both itself and friend and borrowing dulls the edge of husbandry.”
A co-signer faces many potential consequences to his life and finances. None of them are good. The credit bureaus view the loan you have co-signed for the same as your own obligation. If it’s not paid you can be held liable for the loan, the interest, late fees and collection costs including attorney fees. The amount of the loan being carried adversely affects your own debt to available credit ratio. The adverse information that becomes part of your credit reports is every bit as harmful as if you were the primary debtor.
Caught Between a Rock and a Hard Place
The brutal truth of the matter is inescapable. The lender required the co-signer because it had determined that this borrower was likely to default. According to the FTC 3 out of 4 loans that have been co-signed followed by default are paid by the co-signer. Many times the collateral–the car–has been destroyed, the insurance has been allowed to lapse and bankruptcy enters the picture. The co-signer also has a record on his credit reports of all the late payments leading up to this. Even if he throws up his hands in despair and pays he will carry this baggage as negative entries for years to come.
Is there an Auto Loan Co-Signing Alternative That keeps Friend?
Direct Personal Loan May Make More Sense
Consider the option of making a direct personal loan to be applied to an increased down payment on the auto. With a larger down payment the requirement for a co-signer may be lifted since the lender is now at less risk. You are limiting your exposure to the amount of the personal loan. If your friend or relative lets you down by going lame on their obligation to you there will be no record of that on your credit reports. You’re still out the money of course but you own that person for that amount and don’t have to feel bad about turning down future requests for favors. This may not be a perfect solution but it does get you off the hook from a situation where it is next to impossible to say no while protecting your own credit history. Also you will know if repayment trouble is brewing right away without being nosy. If hard feelings still develop the friendship was worthless anyway.