Should You Co-Sign a Car Loan for Your Children?
Co-signing on an auto loan for your child can help them establish credit and qualify for a lower interest rate, but parents should beware of the risks of co-signing a loan.
What We'll Cover
- What it means to be a co-signer on an auto loan
- How co-signing a loan can benefit your child financially
- Risks you take when co-signing a loan
It probably seems like just yesterday your kid was taking their first steps, and now somehow, they’re ready for their first car. We can’t slow down time for you, but we can help you understand some of these new financial decisions you need to make as a parent.
Here we’ll share what you need to know about co-signing as well as the risks and rewards of doing so.
What to Know About Co-Signing on an Auto Loan
When you co-sign on an auto loan, you add your name, financial credentials and guarantee – or a promise to pay – to the loan application and terms on behalf of your child. Lenders will use your personal financial information, including credit scores, income, debt-to-income ratios and other personal information to analyze and determine the loan qualifications and terms. If the loan application is approved, you as the co-signer are fully responsible for the payments if the borrower is unable to make them.
Why You Might Consider Co-Signing on an Auto Loan
Helping your child finance a car not only frees you from chauffeuring them around town (think of all you can do with that extra time!) but also comes with rewards to their financial health. If your child has a strong record of demonstrating responsible behavior, co-signing could be rewarding for both of you. Co-signing on an auto loan can help your child:
- Buy a car when they’re unable to qualify for financing
- Establish or rebuild credit
- Qualify for a lower interest rate, which can save your child money over the term of the loan
And of course, it feels good to be able to help your child. We’re all about handing out good feelings.
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Risks to Co-Signing a Loan
If your child has less than ideal financial management or has a difficult time maintaining employment, it could increase your risks as a co-signer. Life can be unpredictable even in the best-case scenarios. Can you afford to make all the loan payments if your child defaults for the duration of the loan terms?
Pro Tip: It’s important to consider whether co-signing will compromise any of your own financial plans. Be aware of the following risks to co-signing:
- You’re committed for the duration of the loan terms.
- If your child skips payments it could cause damage to both parties’ credit.
- You may have to pay late fees or other costly penalties if your child defaults.
- Financial stresses may adversely strain or damage your relationship.
- Co-signing increases your debt-to-income ratio which may negatively impact your own financial or borrowing plans.
- Co-signing does not inherently provide vehicle ownership.
Key Takeaways
- You, as the co-signer, are fully responsible for the payments if the borrower is unable to make them.
- Co-signing on an auto loan can help your child establish credit and qualify for a lower interest rate.
- Co-signing increases your debt-to-income ratio which may negatively impact your own financial or borrowing plans.
When deciding whether to co-sign on an auto loan for your child, consider your personal financial circumstances, family goals and risk-reward comfort levels. Also consider your relationship with your child and how this step might impact it.
If you’re ready to help your child purchase a car, OneAZ has auto loans to meet your budget. Start the conversation today and explore options that best fit your family.
By Kristen Harris, Financial Advisor
KAHARRIS & CO., LLC
APR = Annual Percentage Rate
