3 reasons not to co-sign a loan

This post comes from Angela Colley at partner site Money Talks News.

A few years ago, a friend told me he didn't have the credit to get a car loan. Would I co-sign for him? I almost did it, but my father stopped me with some wise advice: "Don't gamble with your credit score for someone else's benefit.”

So I didn't co-sign, but my friend found someone else to do it. Nine months later, he stopped making payments, the lender repossessed the car, and the co-signer's credit was ruined. I narrowly escaped financial disaster.

That's my story, but co-signing a car loan, or any loan, is rarely a good idea for anyone. Stacy Johnson explains why in the video below. Then read on for more reasons why you shouldn't co-sign and tips if you do it anyway. 

Here's a recap of why you should be wary of co-signing. And keep in mind that we're talking about car loans in this post, although the advice applies to any loan.

And that could spell financial disaster. Experian's State of the Automotive Finance Marketreport shows that in the fourth quarter of 2011, Americans borrowed an average of $26,419 for new cars and $17,404 for used cars. I know I don't have $26,000 lying around to cover someone else's loan -- or extra money to make that person's payments.

You're risking your borrowing power. Here's how my scenario would have played out if I had agreed to co-sign: At the time, I had a car and a good credit rating. I co-sign my friend's car loan. Nine months later, he defaults on the payments, and the car is repossessed. A year later, I need a new car, so I apply for a loan. The lender sees a repossession and a collection on my credit report. At this point, I imagine the lender doubling over in laughter as he turns me down.

You'll have a hard time qualifying for any loan with a black mark that serious on your credit history. And if you do qualify, you won't get the best (or even good) rates. For example, in the fourth quarter of 2011, the average interest rate on an auto loan was 4.54% for a prime borrower, according to Experian. Nonprime borrowers qualified for 6.34% on average, and subprime borrowers got 9.55% on average.

Not convinced? OK, if you're going to co-sign anyway, at least heed this advice:

"If you're co-signing a car loan, make sure your name is on the title as co-owner. You owe, you own."

That will be important: You can take possession of the car should the primary borrower stop making payments. Then you can drive the car or, providing the co-owner agrees to sign over the title, sell it to help pay off the remaining balance.

• Smart Spending on the go: Get our app for Android or iPhone

More on Money Talks News and MSN Money:

• A simple system to destroy debt
• 5 reasons we need free credit scores now
• Should you pay for credit monitoring?

• The most and least expensive cars to insure

• Calculator: How much vehicle can you afford?

• Drive uninsured for $500 -- legally