Signing off as a co-signer can make vehicle ownership possible for a friend or family member who may not qualify for financing without your help. But co-signing comes with risk — since you share equal legal responsibility for the loan, missed payments or default will affect your finances. However, if the vehicle owner is responsible, co-signing could improve your credit.

5 ways to protect yourself as a co-signer

Consider these factors to safeguard your financial security if you decide to act as a co-signer on a future auto loan.

1. Serve as a co-signer only for close friends or relatives

One of loan co-signing’s biggest risks is potential damage to your credit score. Ideally, you should only assist a friend or family member whom you trust — someone with a consistent income who is financially stable. You need to be confident that the primary borrower will be able to pay but just didn’t qualify due to their lack of financial history or age.

2. Keep copies of all the loan documents. 

Just as you would with any loan for yourself, make and retain copies of any documents related to the loan you’re co-signing. Keep this paperwork until the loan is paid in full so you can reference the loan information whenever needed.

3. Create a contract

Although you will both sign off on the loan itself, having a separate contract stating your expectations of the primary borrower can be an added layer of protection. Such an agreement can also remind you of your arrangement’s seriousness. This contract doesn’t have to be too complicated. Try a promissory note outlining the costs, obligations and what default will mean for both parties. After you both have agreed, bring it to a notary to have it finalized.

4. Track monthly payments

One way to feel more confident in the primary borrower’s ability to pay is to keep track of the monthly payment schedule. This could be as simple as setting a calendar reminder to check on their spending.

While this might feel awkward, remember that your credit is on the line. Reach out and open up a conversation to check in on your friend or family member without micromanaging the loan.

If the primary borrower misses a payment, the creditor is not even obligated to notify you. If you don’t notice the missed payment yourself, your credit score could plummet fast. For this reason, you’ll want to track monthly payments. You may even ask the lender to copy you on monthly loan statements.

Keep an eye on your credit report for the loan’s duration, noting any late or missing payments that may impact your credit.

5. Ensure you can afford payments

When all else fails, you need to know that you can cover the payments on the loan. You may use an auto loan calculator before the purchase to see how much car you can afford. If you cannot pay back the lender, your credit score will be in trouble — and you may risk default and other legal action. The primary borrower has most of the responsibility, but you are ultimately on the hook for the loan as a co-signer.

How co-signing an auto loan affects your credit

The risks of co-signing a car loan are simple, though potentially severe. If the person you co-sign for doesn’t pay, your credit could take a big hit, and you’ll be on the hook for paying the loan. But there are also potential benefits to your credit score:

  • Credit mix: Depending on your current open credit accounts, adding a car loan to your credit report could potentially improve what’s referred to as your credit mix. Your credit mix makes up 10 percent of your FICO credit score.
  • Payment history: Just as your score could decrease if the primary borrower doesn’t make timely payments, it’s possible to benefit — though on a much smaller scale — from them making consistent on-time payments.

The bottom line

Acting as a co-signer is a big financial decision and could lead to interpersonal or financial headaches. But for many consumers, having a co-signer makes the difference between having a vehicle or not. That said, an unpaid car loan can end in repossession, damaging both borrowers. So, if you decide to co-sign someone’s auto loan, protect yourself and be sure you can afford the payments if the primary borrower defaults.