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 Car loan co-signing. Potential pitfall?
  Adding extra payments to reduce interest expense
By the EchoBay Loans Expert
 Car loan co-signing. Potential pitfall?
Dear EchoBay Expert: My 21 year old son has bad credit already and has asked if I would co-sign for his auto loan. What's involved in co-signing for a car loan?

Dear Loyal Reader: To put it in the most basic of terms, if you co-sign for your son's auto loan, you will become responsible for making the monthly car payments if he doesn't follow through with his responsibilities. This means that if for some reason your son weren't able to continue to make the payments on the car, you would have to make them for him, and if you didn't, the lender could proceed with collection actions against you.

This would affect not only your son's credit rating, but your credit rating as well. If the lender wasn't paid, they could repossesses the car and possibly take you to court for damages. Even if you wanted to sell the car, if you are only on the loan papers and not on the title, you'd have no right to do so.

It's also important to understand that even though you're just the co-signer and not the primary borrower, this loan will show up on your credit report as a debt. Unless you're willing to bear the burden of that responsibility, co-signing for your son's loan may not be the best idea.

However, if you're sure that your son will be able to make his monthly car payments without a problem and you don't mind pitching in if extenuating circumstances prevent him from doing so, then co-signing is a great way to help your son rebuild his credit.

 Adding extra payments to reduce interest expense
Dear EchoBay Expert: I'm thinking of adding extra money to my monthly car loan payment to pay off the loan sooner. Will this reduce the total amount of interest I'll pay in total for the loan? Thanks.

Dear Loyal Reader: Yes, any time you add extra money to the principal on your car loan, you will reduce the amount of interest paid on your loan. By how much you decrease the interest paid depends on how far into the loan you are. In the beginning of a car loan, you will be paying much more in interest than you will be towards the end of your loan.

But you can still save money. Let's assume you have a $25,000 auto loan financed for 60 months at 6%. If you added $50 a month to your payment in the very beginning, you would payoff your car in 53 months instead of 60 and save a little more than $400 in interest. But your savings depends largely on when you begin to do this.

With the same loan scenario above, in the first year you will pay nearly $1,300 in interest. But in the last year of the loan, you will only pay $212. So as you can see the earlier you start making extra payments, the more you will save over the life of your car loan.

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