Here’s one of those things that will happen to you at least once or twice in your life and is likely to cause a little emotional discomfort. A close friend or family member needs to buy a car but suffers from bad credit. They are in desperate need of someone to replace their car loan, and given that you are an acquired employee and have perfect credit, they naturally came directly to you.
Your friend (or son-in-law) assures you that it is just a formality and promises that will never stand on payment. Love and trust your friend (daughter-in-law) and tend to move on. However, before you apply, you only need to know what you are getting into.
How will settling a car loan affect my credit?
There are two basic ways that taking a loan can affect your credit:
Your credit score and record. Because you are obligated to make a debt, a credit loan will appear on your credit report as if the loan was strictly your own.
This means, for example, that if your friend (or son-in-law) makes a delay, a negative note will appear on your credit report and your credit rating will decrease. Keep in mind that since you are not the primary lender and therefore do not have monthly statements, you may not know that your credit score dropped a few time periods later.
Like when you apply for a credit card or buy a house or car for yourself. And, as you might expect now, one or more payments overall can mean a drastic drop in your credit score.
Your ability to get credit. Speaking of applying for your own credit, calling a friend (or brother-in-law) can create problems even if your friend (or, you know,) was perfect for his payments. This is because the mere presence of a mutual loan on your credit report can adversely affect your debt-to-income ratio, making it difficult to obtain additional loans. Therefore, it is very important that you consider your loan needs, both in the present and in the future, before agreeing to replace the loan.
A few things to consider before you get started
Keep a record. Make sure you receive copies of all credit documents. You may also want to insist that the primary borrower provide copies of all receipts and subsequent correspondence with the security. Remember, your credit score is on the line as much as your primary lender, so make sure you stay informed.
Be prepared for the worst. Because you will be fully liable for credit debt if the primary borrower fails to make payments, be sure you have the financial resources available to cover the additional monthly expenses that may result.
Concessions from the lender. You may be able to secure several concessions from the lender before agreeing to make sense. For example, a lender may be willing to hold you solely responsible for repaying the principal on the loan and not for any subsequent payment or other fees. You may also request that you notify the loan directly if the primary lender is late or becomes defective in his or her monthly payments. The borrower can refuse your requests, but it does no harm.
An unusual time when imitation can be good for everyone
If you do not have a credit score and a financially capable close relative, you can both benefit from a convening arrangement.
In a case described by one of the major credit reporting agencies, a happy, no-credit (not bad, which is another story) car has been able to find a 0% auto loan with interest – if the loan was made on behalf of and with a relative as an assistant.
In this example, the lucky person could start building a credit score because of the help of a trusted relative. If you are in a similar situation, it might be worth discussing such a plan with your relatives, rather than regretting the possibility that you may not be able to take a loan at all.
Raising a loan is fraught with risk and can cause a lot of stress. However, if all goes well, it could also be a positive experience that strengthens personal relationships. Just be sure you fully understand the potential pitfalls before agreeing to it. And remember, if you are not completely happy with the arrangement, don’t be afraid to say “no”. You may end up keeping an important link.