Effect of Co-signing Car Loan on Credit Score

Maybe you know someone, a family member or a friend, who needs to purchase a car but cannot do so due to their bad credit score. They really need someone to cosign their car loan. They call you one day since they know you have an impeccable credit score, and now they want you to co-sign their auto loan.

They tell you that this is only a formality, and even promise that their payments to you shall always be on time. You trust and love the person and really want to help them. We know you do, but we would also like you to know that there are certain obligations and risks involved.

Don’t jump in just because a loved one is telling you to do this, since this is a matter of your money. If you lose, it shall be your loss alone. Your concerned loved one won’t be able to help you out. Your credit score may take a hit, which can mean you won’t be able to take loans easily next. Looking out for yourself does not make you selfish. Only when your wealth grows and is protected can you help others.

What does co-signing an auto loan mean?
First of all, it is important to know what you’re getting yourself into. What does it mean to cosign an auto loan? It meanTs that you’ll share the responsibility of repaying the loan on time, just as if it were your loan. If your loved one, family member or friend cannot repay the loan, you are obligated to repay it.

How does it affect your credit?
There are two ways in which co-signing a car loan, or any loan for that matter, can affect your credit. The first way is my affecting your credit score. You, as a co-signer of the loan, are obligated to repay the loan if the primary borrower is unable to do that. In such a case, it shall be entirely your responsibility. A co-signed loan will be seen on your credit report, as if you have taken the loan. If the primary borrower makes a late payment, your credit report and score will be affected. And you know what low credit score means.

Here’s one thing to keep in mind. You are not the main or primary borrower, and thus won’t get monthly statements or late payment notices. You might now even know about your lowered credit score unless you keep getting credit reports every couple of months or so. You may want to get a new credit card yourself and be unpleasantly surprised. Due to the primary borrower’s missed payments, you are not able to get a new credit card or loans when you need them most.

The second way it affects you is by affecting your ability to get a loan. As we said before, due to the primary borrower not making timely payments or missing them entirely, your credit score will be affected. Too much of that, and you yourself won’t be able to get new loans. Pretty infuriating, right?

Should You Go For Car Loan Refinancing?

 

A car loan refinancing is the process of replacing your current auto loan with a new one from a different lender. Doing so can help you in several ways. It can give you better repayment terms like better rates and loan tenure. You get better benefits, features and terms with a car loan refinancing.

Why should you go for car loan refinancing?

There are several benefits of getting this facility.

It lowers your interest rate: If you do find a suitable refinancing loan with a lower interest rate than what your current loan is giving you, then go for it. With a lower interest, you save more money over time. And, as they say, more money saved is more money earned. All you need to do is to pay off the loan you have at hand and then talk to the new lender. Remember though that prepayment charges for the old loan is lower than the refinancing’s benefit. You may also want to think about refinancing your car loan in case your credit score has improved since the last time you took a loan. If so, you can be eligible for a loan with better interest rates.

It modifies your loan tenure: When you get an auto loan refinancing, you can modify the tenure. This helps you in bringing down your monthly EMI payments. For instance, if you increase the tenure, you can pay over a longer time safely and this brings down what you pay each month. However, this means you’ll be paying more money in the long term. You can reduce your loan tenure. However, here the EMIs shall be higher even though you will be able to pay off the loan faster.

To change the agreement of a co-signer: On refinancing a loan, you can add or remove a co-signer. If your current co-signer does not want to give the lender a loan guarantee, you can remove their financial responsibility.

To change the auto loan terms: If you weren’t happy with the terms of your loan last time, you can use a car loan refinancing to change the terms now. If you get a better auto loan, you can choose to refinance the loan to get all the features.

Things you need to remember before taking a loan refinancing

There are a few things to know about before taking the step of getting a loan refinancing.

Prepayment charges: To get a loan refinancing, you’ll need to prepay the current loan, and in most cases that involves a prepayment penalty. This can range between 1% to 3% of the loan.

Your car’s depreciating value: In case you buy a new car, and think of refinancing the car loan. The value of your car slightly comes down and new lenders may not want to refinance cars and automobiles that are too old. Even if you do get a deal, it may not be a good one.

Reliability of the lender: Getting a trustworthy lender is very important. Don’t go for a refinancing just because of lower interest rates.

Additional fees and charges: If you choose to go for a refinancing, you’ll have to apply for a new loan from another bank. This involves giving some processing fees and additional charges. You’ll need to determine how much these shall be and if these are ok with you, or not.

The Do's and Don'ts of Applying for a Car Loan in 2021

Remember how you felt when you dreamt of buying your first bike as a teenager? The sense of all that freedom and excitement? It seemed as if the world had opened up to you, and that getting a bike was an initiation for stepping into adulthood. Besides, bikes are cool!

Well, adults pretty much get the same feeling when they buy their first car.

However when it comes to buying a car, very few can buy it with cash just out of their wallet. Most people have to take out a car loan for that.

In this article, we are going to tell you about the Do’s and Don’ts for applying for a Car Loan.

Select the right car

Before going to the showroom and buying the first shiny car you spot, you need to figure out what type of car you need? If you go on frequent trips with your family, an SUV can be the perfect choice due to its huge space. However, you’ll find it hard to park in the city. If it is for special occasions, you may want to buy more luxurious models. If you want more heavy-duty protection, try a Scorpio or even an imported Hummer!

Don’t make a mistake in calculating how much you can afford

This is one of the biggest mistakes you can make. This is one of the most surefire ways of falling in a debt spiral. When taking a loan, a lower down payment translates to a lot of money to be repaid back as loan amount.

If you have loans already, rethink about taking yet another one. Sure you may think you can afford this loan too, but together with all your existing ones? That can be a problem. Additionally, ensure that your EMIs across all your loans are less than ½ your monthly income.

Think about your credit score

When taking a loan, you do need to think about keeping a good credit score. The higher your credit score, the lower your loan interest rate can potentially be. The lower the score is, the higher it can potentially be. In fact, if your credit score is too low, you may not get any loan at all, and even if you do, it will be on very steep and unfavorable terms.

Don’t choose the very first financing offer you get

Your very first financing offer may be from the car dealership itself if you have tie-ups with financing companies. However, what you should be doing is browsing through multiple financing deals before picking one. Of course, then you can pick the one that suits you the best.

As you can see, there are certain things which you should be doing and should not be doing when getting a car loan. Here’s hoping you get the loan, and safe driving!

Steps to Transfer a Car Loan - How to Transfer Your Car Loan to Another Person?

 Steps to Transfer a Car Loan

Transferring an auto loan wasn't allowed earlier, but there are two different ways to do it now. One way is to modify your existing lender - notify your lender that someone else will be purchasing your car and repaying the rest of the loan.

The other way is to do a balance transfer and seek a new lender who will pay off the remaining debt and issue a new loan to the new borrower. Let me tell you the various steps involved in transferring an auto loan to someone else.
Check Your Auto Loan Documents

Before you feel too elated by the prospect of unburdening yourself of this financial anxiety, read and re-read your auto loan agreement. The first thing that you need to make sure is that your lender allows a car loan transfer.

Reading a loan agreement can be quite a chore. Be patient! If your loan agreement papers say that transfer is not allowed, then you're barking up the wrong tree. Sorry!

If you're sure that the plan is actionable, seek the lender's help to get clarity on the loan transfer process.
Find A New Borrower

Since you have already decided to transfer your loan to someone else, I am assuming that you need to find a buyer. If you have already found one, you're in a win-win situation! If you are still struggling to find a new buyer/borrower, cheer up! A car dealer can find one for you.

Just approach some recognized and trustworthy second-hand car dealer, and they will find you an interested buyer from their long list of contacts.
Get Loan Transfer Approval

First things first - get the green signal from the lender. The new borrower must prove his creditworthiness in order to qualify for the car loan transfer. He/she should have a stable income and a clean track record of credit repayment with banks. The new borrower will now be responsible for repaying the loan.

So, isn't it obvious that the lender will conduct a thorough background check before deeming him/her fit for the loan and approving the loan transfer?

A single default in the prospective borrower's past can adversely affect his/her credibility and might compel the lender to disallow the transfer of your auto loan to the concerned person. If you have found someone with a stellar credit history, then you are in luck! You can approach your lender to initiate the formalities related to auto loan transfer.

The new borrower must submit a few necessary documents like proofs of identity, address and income. Additionally, a form requesting the transfer of the auto loan should also be submitted by the new borrower.

Change the Car Registration

When you are planning on selling your car, you need to change the car registration too. It is not just a fleeting formality but a necessary prerequisite to transferring the loan documents. You need to visit the nearest RTO (Regional Transport Office) for completing this formality.

Once you submit the required documents and pay the necessary charges to initiate the re-registration procedure, the RTO will take around 14 days to process the request.
Approach Your Insurer

When you sell your car, you wouldn't want to bear any further liabilities associated with the car. This involves your car insurance expenses too. Approach your current vehicle insurance company to check the terms and conditions for transferring your car to another individual. You must ensure that the new owner, who is taking over your loan, complies with the insurance requirements.

Submit all the necessary bank documents to the insurance company to let them make the necessary changes so that you are exempted from paying any additional premium.
Remember...

You should know that it'll be futile to visit the RTO or your vehicle insurer before the lender gives you a formal approval for your loan transfer request. Unless you furnish the necessary documents from the lender, neither the RTO nor the insurer will entertain your requests.

Once you get through all the above-mentioned procedures smoothly, you can go back to the lender, submit all the necessary documents and get the burdensome loan off your shoulder. However, brace yourself to pay a certain loan processing or loan transfer fee to the lender. The charge is mostly based on the tenure of the loan, and the amount that is left to be paid.

However, rest assured that spending a few bucks here can leave your bank balance at peace once the transfer is successful.