We’ve all gotten this phone call before at some point. Your friend from high school that you’re still friendly with rings you up and asks for a favor. It could be one of three things you think to yourself:
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A. He needs to borrow a few bucks. (Don’t worry, he’s usually good for it)
B. He needs some help moving into a new apartment. (The third move in as many years, but OK)
C. He needs you to watch his dog for a week when he takes a trip to Thailand or somewhere exotic. (It’s cool, his dog is awesome)
All reasonable requests that you would probably say yes to without much hesitation. At the end of the day, that’s what friends are for, right? However, he goes on to explain to you that he’s about to lease a new car and he needs a co-signer in order to get approved. That’s all, you think to yourself? All you need is my signature on a piece of paper and I don’t have to spot you any cash or throw my back out moving a couch up three flights of stairs? Done.
Seems pretty harmless, right? Wrong. In this hypothetical situation though, this would be the part where the record scratches and everyone stops what they’re doing and looks at you. Yes, cosigning for a car might be as simple as signing on the dotted line, but in reality, you just made a three-year commitment to putting your stellar credit on the line for someone that probably isn’t the most responsible person you know.
But in order to understand the gravity of becoming a cosigner, we must first delve into what exactly becoming a cosigner actually means for your long term credit and financial future.
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What is a c0-signer?
A co-signer is an individual who attaches their financial standing to another person’s transaction in the eyes of the bank. Normally, this person has exceptional credit, as this would be the only way to prop up the primary signer’s own subpar creditworthiness.
A co-signer can and should be only close friends or family since they are essentially putting their own financial standing on the line in the event the primary signer defaults on their payments.
When does a co-signer come into play when leasing a car?
There are a few scenarios in which a cosigner can come into play when leasing a car. The first situation can occur when getting any kind of general approval for a vehicle. For example, if the primary signee has a 580 credit score and he’s trying to get a BMW, chances are he’s going to get declined. At the end of the day, this person has not shown enough creditworthiness to the bank in order to be approved for a loan and thus, need a co-signer. However, if you take a person with a 780 credit score and attach that person’s credit history to the deal, and hold them liable to make the payments if the primary signer defaults, well that’s a loan the bank is willing to approve.
Why is that you ask? Because the bank wants to make sure they’re getting their loan back, and there’s a greater assurance that happens when you have someone who’s been a responsible lender in the past attached to this particular loan. In other words, there’s less risk involved on the bank’s end.
Another scenario where a co-signer comes into play is when we’re talking about credit tiers. Say someone IS approved for a car with around a 670 credit score, a good but not great score. Although this person was approved, they more than likely were approved at a higher credit tier, resulting in a higher lease payment.
This jump in payment is because the bank deemed this person a higher risk than normal, so they essentially need extra financial compensation from the consumer in order to make the risk worth their while.
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However, with the help of a co-signer with stellar credit, a person that as approved as a Tier 5 customer, could jump all the way to a Tier 1 customer, because the co-signer’s credit helped impact the lender’s decision to one that they’re comfortable with.
What are the risks associated with co-signing?
As I mentioned earlier, there are significant risks to cosigning for a vehicle on the part of the co-signer. If for whatever reason the primary signer starts missing payments, not only is he/she torpedoing their own credit, but the co-signer’s as well.
There have been countless stories of ruined friendships, all because someone stopped making payments and now that perfect 800 credit score of yours is sitting below 600, all for a loan that wasn’t even yours in the first place. And if that car ends up as a repossession by the bank, guess what, that’s going on your credit report is well, impacting your future credit standing. Put it this way, you probably won’t be hanging out with your “friend” anytime soon if this happens.
And if a meteor to your credit score wasn’t bad enough, you’ll also be on the hook for the entire lump sum of the loan. That’s one really expensive favor that you’ll end up paying for, for quite some time.
Are there any benefits to co-signing?
Let’s lighten things up just a tad. Although there are a multitude of risks associated with co-signing on a lease, there are a few noted benefits. The first one, is that if your responsible friend or family member DOES make their payments on time throughout the lease, congratulations, your credit score just got a nice boost, along with theirs.
Leasing a car can be especially beneficial for those with little to no credit history, and cosigning for that person can really help them get started on their credit journey.
Also, you’ll be helping someone either get into their first new car or in a lot of cases, their dream car. You’re like a co-signing superhero if you really think about it, and your good friend or family member won’t forget that either. Expect some nice gifts around the holidays.
Ok, I understand all the pros and cons of co-Signing… should I still do it?
That decision is ultimately going to be up to you. Read this post again and really determine if you are ready to take on all of the risks and responsibilities that come with being a co-signer.
Do you trust the person that you are co-signing for to make their payments on time?
Are you willing to potentially let a missed payment or worse, a repossession, get in the way of your relationship with this person?
Are you ready to put your own credit health on the line that might impact your financial future?
These are some of the questions you should be asking yourself before making any decision to cosign. Ultimately, if you don’t deem it worth the risk, don’t put yourself in a situation that might come back to haunt you. However, if you trust the individual with the health of your credit and are willing to help out, then cosigning is an extremely helpful gesture to those who need it.
Still not sure about all the pros and cons of cosigning for an auto lease? Contact the automotive experts at Capital Motor Cars. Our seasoned and knowledgeable auto consultants will walk you through the entire leasing process, including whether or not you need a cosigner or not.