What should you do when you need a vehicle, but have to have a co-signer? A reader, Randi, wrote in with this question:

Our chapter 7 bankruptcy recently discharged and we reaffirmed the loan on our minivan rather than include it in the bankruptcy since we were current on the payments.

The unfortunate part to this is that the loan is for more than the value of the van. We qualified for a loan for a new car that we would have reaffirmed but because of the upside-down value on the old loan, we could not get a car loan for a replacement in a monthly payment that we could afford so we decided to keep what we had.

Now, unfortunately, the van is in need of some serious repairs that we would have a hard time paying the large sum of money. We just don’t have it yet nor is buying a cheap used car an option, again no money saved yet. My dad who has great credit has offered to co-sign a loan for a new (used) car.

We don’t want to buy another old, junker of a car to get us through the next couple of years until our credit improves since that is what we already have and it is nickle and diming us to death. I did read on the blog that we should avoid a co-signor at all costs but I am not sure we have any other options without paying exhorbitant rates on a new (or newer used) car loan.

One thing about our credit is that we are and have continued to be current on our mortgage, utilities, and both car payments even prior to the bankruptcy so we continue to have record of current payments.

Once we have a bit of money saved for the fees, we do plan to open secured credit card accounts to help improve our credit score. We only included credit card debt in the filing. Our credit scores range from 590-630 since the bankruptcy.

Thanks for the help.
Really Hoping For a New Car

Thanks for your question Randi!

You sound like you are taking all the right steps to recover from your bankruptcy. You are current on your utilities and mortgage, you know your credit scores, and you’re planning to get a couple of secured credit cards. In time these things will recover your credit.

The problem is though, you need a car now, not later. I understand. I debated the very same thing not too long ago.

As far as co-signing goes, it is dangerous for two reasons:

1. The person who co-signs is responsible for the debt too. If you make a late payment, or default on the loan, it will ruin their credit as well.
2. Once lenders see that you have both a bankruptcy, and a ready do-signer, it will be difficult to get a loan without the co-signer’s signature.

So, before you jump into co-signing, take a look at a few things.

Co-signing can be a bit of a trap, but it is a valuable option. In your case, I’d say it’s probably a good option as long as you work hard to repair your credit in the next few years.

One piece of advice (from my own experience) is to look for a temporary part time job. Use the income from this part time job to set up an emergency fund.

You should do this before you get those secured credit cards. Otherwise your new credit cards will become your emergency fund and you will be right back in debt.

As long as you have an emergency fund set up, then you know that you can make the payments on your car too, even if something happens.

The main thing to understand is that your dad is risking his good credit rating so that he can vouch for you. It’s wonderful to have people in your life that care that much. The best thing that you can do to protect his credit rating and yours is to build up that emergency fund as a first priority.

Just make sure that you take a hard look at your monthly budget before obligating yourself to a new loan. It’s best to go into the dealership knowing exactly how much you can afford to pay on a vehicle, rather than letting them lend you as much as they want to. Especially with a co-signer.

Auto dealerships will never have your best interests at heart. As long as you know where you stand financially, and you don’t obligate yourself to a payment you can’t afford, then everything should be fine.

Thanks for your question!

Have a question for us? Leave a comment below!

Keep Reading and Grab Our Free RSS Feed:

• How To Get A Car Loan After Bankruptcy
• How Much Debt Can You take?
• The Surprising Truth About Bankruptcy

This entry was posted on Wednesday, February 4th, 2009 at 16:53 and is filed under Reader's FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.