Co-signing a Car Loan for a Girlfriend or Boyfriend: Bad Idea?

Does your boy- or girlfriend make less than $1500 per month?  Do they have bad credit?  Do they want you to co-sign an auto loan for them, so the bank will approve them.  In general, yes, this is a bad idea.  As you probably know, when co-signing a car loan, you take on the legal responsibility of paying off the vehicle in the event that the primary borrower (your girl/boyfriend) fails to do so.  This may seem like an unlikely occurrence, but it happens all the time.  There are three main reasons co-signing in such a case in a bad idea:

  • It places undue strain on the relationship. The primary borrower’s management of the loan is reflect on your own credit report.  That means late or missed payments could devastate your credit score, even though they aren’t your fault.
  • It impacts your own ability to finance anything. Having a co-signed loan on your credit report increases your debt-to-income ratio, thereby making it more difficult to get approved for any loan of your own that you need.
  • Lenders will come after you first.  If the primary borrower starts failing in their payments, the lender will typically come after the co-signer first.  That’s because they know this person–you–is more likely to have the income to make the payments being missed.
  • What if you break up? No one likes to think this way, but relationships go south all the time. Your boy/girlfriend could cheat on you, then quit making their car payments, and you would have no legal recourse–you would have to pay off their auto loan!

All in all, we cannot recommend that any consumer co-signs for a girlfriend or boyfriend.  Co-signing is much better left for parents in very stable financial positions who would have no problem handling the payments if their child cannot make them him/herself.

Don’t Be Pressured!

In many cases, we have seen consumers feel pressured to co-sign a boy/girlfriend’s auto loan as a means of proving how committed they are to the relationship.  In other words, co-signing becomes a gesture of sorts.  This is simply foolish.  No boy/girlfriend should require you to make bad financial choices in order to prove your love.  And we are here to tell you:  co-signing in such a scenario is a bad decision.

Alternatives

If your girl- or boyfriend really needs a car, then you could help them create a budget that helps them save enough for a used car.  Many financial experts advocate spending just 10% of your what you make each year on a car.  So if you earn $40,000, you should only buy a $4000 car.  The maximum end of this range is just 30-35%–or around $12-14,000 with a $40,000 salary.  Cars are status symbols in our country, which is unfortunate, because they are also very bad investments.  That’s why spending as little on them as possible is ideal.

 

New National Automotive Finance Association (NAF) Survey Illuminates Industry Trends

In Forth Worth Texas a study conducted between February and April 2014 regarding loan terms suggested that terms are getting longer and scores are getting lower each year. The study was done by the National Automotive Finance Association and used sub-prime lenders as their testing group.

The article covers the key findings of the study addressing them in a comprehensive but decisive bullet format. An auto finance program director named George Halloran of Benchmark Consulting said two-thirds of the people surveyed had a decline in return and a very small percentage had a negative return while some continued being profitable. The survey provided the data from which they were able to determine that loan loss allowance was up by 38 basis points while there was no change to the cost of funds. This indicates the improved collection effectiveness can continue while achieving lower results. The article goes on to provide a fascinating look at the way that younger consumers will affect auto finance but not to worry, for now loan availability is stable.

Read the full article here:
http://www.autofinancenews.net/naf-survey-reveals-key-new-trends-in-auto-finance/

How Often Should You Check Your Credit Score?

The two most important aspects of your financial well being are your credit score and credit report. You cannot understand one without knowing the other. You can get a copy of your credit report from each of the the three major agencies for free once a year just by visiting www.annualcreditreport.com. Unfortunately, checking your credit score is not free. Each credit reporting agency will charge a separate fee. You can also get your score from FICO, for a fee. Having said all of that, there is no real guide as to how often you should check your credit score.

Tri-Annual Credit Report Checks..for Free

Let’s start with your credit report. Since you can get it for free once a year from each agency, you should pull it from a different agency every four months. Say in January, pull it from Experian, then in May pull it from TransUnion, and in September you can get it from Equifax. That way you have an eye on you report year round, but each one is still free.

Checking Your Credit Score

Now, on to your credit score. A quick caution: when you pull your credit score directly from one of the major agencies or FICO it is viewed as a soft inquiry and does not lower your credit score. On the other hand, using a third party is viewed as a hard inquiry and will adversely affect your score.

In most instances there is no need to monitor your credit score on a regular basis. By keeping an eye on your credit report, you will have somewhat of an idea as to your score range. Additionally, many major credit card issuers are offering a free credit score tool. Sign up for it. They are provided through a deal with one of the three major agencies and appear as a soft inquiry. Granted, the provided score is only an estimate, but it is a close approximation.

Loan Preparations

The only time you should pay for a credit score is if you are thinking about applying for a loan. In that instance, you should get your score 3-6 months prior to applying. This will give you time to make any adjustments necessary. For instance, if your score is 685, right on the border between an ”Average” and a ”Good” credit rating, you can pay down you credit card debt. This should boost your score by the 6 points needed to be in the higher category, saving you money enabling you to qualify for a lower interest rate.

As you can see, knowing your credit score can be a handy way to save yourself money over the life of a loan, but you only need to pay for it when you are considering a loan.

Should You Have Uninsured Motorist Coverage?

Photo by Thomas R Machnitzki
Photo: Thomas R Machnitzki

It is mandatory to have valid car insurance at all times in every state. That being said, some statistics from the Insurance Research Council (IRC) indicate that over 14% of drivers nationally are uninsured–that means, if you’re in an accident, you have a 1 in 7 chance that the other driver isn’t insured.  That quite a risk!  Plus, these statistics vary widely from state to state, with states such as California, Alabama, and Mississippi having uninsured rates of 25% or higher, and our home state of Indiana having a higher-than-national average of 16%. Keep in mind, these statistics don’t even include underinsured drivers, which can be almost as problematic.

These rates have been on the rise since the recession, as researchers have uncovered a close correlation between the health of the economy and the number of uninsured motorists on the roads. Of course, common sense says you don’t want to be in an accident with such a driver, but the consequences depend on your state’s laws.

Tort versus No Fault

In “tort states,” such as Indiana, the motorist at fault is required to pay damages. So if you get into an accident with an uninsured or underinsured driver, and they are at fault, you could be in trouble.  If they don’t have insurance, chances are they won’t have the assets to pay your damages either. Currently, 38 states are tort states.  In these states, you should have uninsured/under-insured motorist coverage on your vehicle at all times.

In “no-fault states,” fault doesn’t matter. Each driver pays his or her own damages. That means your insurance will cover you, even if the other driver was at fault in the accident. In these states, uninsured motorist coverage–or UM/UIM as it’s called–isn’t as important. However, it can still help you in the event that you incur severe damages, and you are either unable to sue the at-fault driver (your ability to do so is somewhat limited in no-fault states), or else you can sue but the other party doesn’t have sufficient assets to pay your damages.

UM Coverage on a Financed Vehicle

There are many major lenders who require that you carry this type of insurance throughout the life of any loan you may have on your vehicle. If you let coverage lapse, some states allow lenders to acquire coverage for you, then add it to the balance of your loan. Since lenders are not required to find the least expensive coverage or even consult you about which company they use, you can have thousands of dollar added to your balance over the life of your loan.

Luckily, uninsured/under-insured motorist insurance is a fairly inexpensive addition to a standard car insurance policy.

What Does “OAC” (On Approved Credit) Mean When Financing a Car?

When obtaining a car loan, there are often varying degrees of loan rates offered. Typically the best rate is only available “OAC,” or “on approved credit.” OAC is a standard that relates directly to one’s credit score. The better one’s credit score is, the more likely one will be to secure an OAC rate.

When one goes to purchase or lease a car, the dealership will run a credit check on the customer. Whether the applicant qualifies for an OAC rate is then determined by the credit score. Typically, a good credit score will result in a lower rate while a bad credit score will result in a higher rate, but typically the lender or dealer will not disclose the actual score necessary to secure an OAC rate.

People establish credit when they get credit cards. Someone who pays their cards off and doesn’t have a negative credit history will probably have decent credit. Someone who has a lot of cards with high balances and some blemishes on their credit report will generally have a poor credit score, but that does not mean someone with bad credit cannot get a loan.

Maintaining a good credit score which translates into a good OAC rate is essential for individuals who are looking to buy or lease a car.