Cars For Girls: THE IN'S & OUT'S OF CO-SIGNING A CAR LOAN
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The Auto Channel
Louisville Bureau
An unfortunate thing about being a teenager or a young adult is you're just not always taken very seriously. So attempting to make important decisions, like buying or what's also called financing a car, can be a difficult road to navigate. And because we're kind of new at understanding how to work the system, we are often taken advantage of or downright rejected. This is where – whether we like it or not (and most times NOT) – a parent or guardian does come in handy.
No Credit History Equals No Car Loan
Hey – when we borrowed thirty bucks from dad last week, we paid it back – that should be good from something. And you've always been on time to your job. You've got what's called creditability. So why won't the bank or dealership give you that car loan?
- Car loans are based on credit history. If you go to buy a car, the dealer is going to use your Social Security number to look up your credit report. This document provides information about your credit history – like if you have a bank account or if you have a credit card in your name. Also, they'll pull your FICO score. This number, which ranges from a low 500 to a high 850, is determined by several different factors, such as how long you've had your financial accounts, if you pay bills in your name on time, or if your credit cards are maxed out.
So you can promise until the cows come home you'll make your payments, but the dealership uses these documents as concrete proof you're creditable. So do landlords, and even potential employers.
Piggy-Back Off an Established Credit User
It's the chicken-and-the-egg saying: What came first? I mean, how can you show a credit history if you can't get credit because you don't have a credit history? Geesh.
- Talk to a trusted parent or guardian about co-signing for a credit card. Build your credit by starting with something a bit more manageable and controlled than a big old car loan.
- Get a secured credit card. Most credit cards are based on the trust you can spend now and pay later. A secured credit card works the opposite way: You put money upfront and can charge up to that amount.
Co-signing is about drafting off someone else's (hopefully) good credit history in order to establish your own. It's important YOUR NAME goes on the paperwork, so chances are you and a parent will have to sign up for a new card rather than just getting your name on an old account.
If Either of You Mess Up, it Reflects Poorly On Both Your Credit
If you go on a spending blitz and try and hide the bill – I'm talking about bad behavior you OR your mom or dad do – your credit is no longer non-existent, it's now complete toast.
- Learn as much as you can from the credit bill. Have your co-signer explain what an interest rate is, how much yours is, and how it affects the total cost of your portion of the bill.
- No matter how much money you make, your credit follows you. It takes seven years for a negative mark to be removed from a credit report, and keep in mind there are three companies that provide credit reports: TransUnion, Equifax, and Experian.
Even if you aren't regularly using the credit you're piggy backing on, your name and future are involved so learn as much as you can. This can be a BIG moment in our life, as we're faced with some issues of whether or not we want to manage our money like our parents do!
The Big Moment: The In's & Out's of Co-Signing for a Car Loan
So after much vehicle research – do it here on The Auto Channel to find out how much car you can afford – and some credit building, you're ready to walk into the dealership and get YOUR NAME on the loan paperwork with a trusted parent co-signing below YOUR dotted line.
- High FICO score equals a low interest rate. So if you (and your parents) have been good – having a low debt-to-credit ratio (meaning if you are approved to use $10,000 worth of total credit and you only have, say, $500 left to pay off on a Nordstroms card), a history of paying on time – you'll get a great interest rate. The difference is thousands.
- Bite the bullet and opt for a 24-to-36 month lease. This means higher monthly car payments, but less interest costs in the end. The difference, again, is thousands.
- Default on the loan and your co-signer will have to pay up. Mom and dad will be responsible if you miss a payment, you'll hurt all three of your credit scores, and you won't have transportation. This is why you NEVER, NEVER want to co-sign for a friend!
Think of mom and dad in this situation as helpers in establishing your credit, not a bankroll for your wheels. Co-signing for a car loan in a sense gets you another step closer out of the house and on your own!
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