There is always a risk of having a certain amount on any credit account, even if you do it for your son or daughter. When you take out a car loan for your child, you take full responsibility for the debt. If your son does not pay or pays less than the minimum amount due, the delay will be included in his credit report and yours.
Risk related to taking a car loan
Even though your name would be on the loan, the bank cannot tell you if your son is in arrears, at least not immediately. It is your responsibility to ensure that you make each payment on time. Otherwise, you may cause damage to your credit report and assessments until you receive information about the default.
If your son stops paying in full, you will be responsible for the remaining loan amount. The creditor can then contact you to collect the debt.
If the account is sold, it will most likely be reported to your credit report, including your son’s.
Even if all payments are made on time, each time, lenders will consider the loan amount when assessing the credit report for the purpose of the loan. The debt will be included in the total amount due when credit points are calculated.
The increase in total debt can have a negative impact on your credit rating.
Benefits of car loan
Let’s put the credit risk aside, thinking of a car loan for your child can certainly help him start building a strong credit history for himself. Because you have a strong credit rating, having you as guarantors is likely to allow him to receive better rates and deadlines than if he had submitted his own applications.
Just make sure that your son fully understands the role of the guarantor and that his actions, good or bad, will affect you directly. You do him a great favor and he must have serious responsibility to you.
Other options to help your child build a loan
If your son doesn’t have a credit card yet, adding him to one of your credit card accounts as an account partner or authorized user is another option that can help him build a loan. As a joint account holder, he not only has the option of using a credit card, but will also be responsible for payments. This means that any subsequent payment on your account will affect both credit histories.