cosigning a car lease
Saving Money

What to Know Before Cosigning a Car Lease or Loan

It’s a big thing to buy or lease your very own car. Maybe someone you know and love wants that for themselves—but perhaps their poor credit makes it too expensive. They can’t get a good monthly lease rate or a low interest rate. Of course, someone with good credit cosigning a car lease or loan can solve that problem.

As with most things, however, it does come with very real risks. Make sure you know what you’re getting yourself into before taking the cosigning plunge.

The risks of cosigning a car lease or loan

The most obvious risk to cosigning for someone else is that they’ll fall behind on their payments. There are two ways this can negatively impact the cosigner:

  1. Their credit runs the risk of lowering if payments aren’t delivered on time, especially if it becomes a habit.
  2. The cosigner may be liable for the remainder of the vehicle’s payments if the owner is unable to complete them (i.e. they default on the loan).

These aren’t just warnings of something that could happen. It has happened. Here’s a real-world example: A mother cosigns the lease of her son-in-law. He ultimately goes to jail and she is left to pay off the remainder of the car.

Of course, that’s a pretty bad scenario, but it’s not uncommon. People who cosigned for their significant other but broke up, parents who cosigned for their children in the hopes they’d pay as they agreed, even coworkers cosigning to help another employee out—all of these and more have ended badly. 

The bright side on cosigning a car lease or loan

Cosigning a car lease or loan isn’t all doom and gloom. It often works out for the best, whether it’s with a parent and child, domestic partners or best friends.

In some cases, a cosigner can help the driver save half on interest payments. Over the course of a three-year lease, five-year loan or any other setup you have, that really adds up.

Credit gives a good example. If you’re paying for a vehicle with an invoice price of $37,851 without a cosigner, you might pay an interest rate of 10%. Over the course of six years, you’ll pay $50,488—including $ 12,637 in interest.

Say you get a cosigner and cut that interest rate down to 5.76%. You’ll pay just $44,742 during the same time period, with $6,891 of that coming from interest.

That’s a lot of money saved over the long term! The driver can put those savings toward a down payment on a home or any other even an entrepreneurial adventure. In short, it can make a world of difference—as long as you’re doing it with the right person.

What’s the difference between cosigning and co-applying?

Becoming a co-applicant for a car lease or loan means you’re buying or leasing the vehicle with the other person. On the contrary, cosigning just means you’re agreeing to take the fall in case the other person cannot pay, and your credit is better so the lender will take some pressure off the driver. 

How to get out of your cosigned agreement

If you feel like you’ve gotten yourself into a sticky situation, you should attempt to remove your name from a cosigned loan quickly. Here are three ways to do so

  1. Acquire a cosigner release
  2. Have the driver of the vehicle refinance the loan under only their name
  3. Sell the car and pay it off (if you bought rather than leased)

Of course, sticky situations aren’t always expected. I recommend talking to your signing partner about the possibility of removing your name under extenuating circumstances, that way there’s an agreement between the two parties ahead of time. After all, if you can’t talk about the very real possibility of a cosigned hiccup, then perhaps you shouldn’t be cosigning a loan at all.

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Rachel Curry
"Hey! My name's Rachel Curry and I'm a full-time writer who loves telling the world's stories as much as hanging with my dogs (and that's saying a lot). A University of Delaware graduate, I've traveled extensively, living everywhere from Ireland to Thailand. Bylines include Matador Network and Delaware Today."

    2 Comments

    1. Dave Ramsey does not approve cosigning

    2. The Debt-Free Community does not approve.

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