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.
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.