Key takeaways

  • It is best to co-sign only for a close friend or relative who can reliably manage their finances.
  • Co-signing on a car loan can potentially hurt your credit if you or the primary borrower defaults or makes late payments.
  • Following the application to co-sign for a car loan, you will also experience an initial drop due to the hard credit check.

Signing off as a co-signer on an auto loan can make vehicle ownership possible for a friend or family member who may not qualify for financing without your help.

Co-signing comes with risk. Since both the primary borrower and co-signer are legally responsible, missed payments or default will affect your finances. However, if the vehicle owner is responsible, co-signing could improve your credit.

How co-signing an auto loan affects the co-signers credit

Agreeing to co-sign on an auto loan can make vehicle ownership a reality for a driver who might not be able to get one. But your credit score will be impacted. Weigh the benefits and drawbacks of co-signing before agreeing to it.

Potential risks

One of loan co-signing’s biggest risks is 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. Your credit score will take a hit if the primary borrower misses payments and you do not step in to pay instead.

  • Initial drop: Once you co-sign a car loan, the hard inquiry generated during the application process could slightly affect your credit. You could also see a slight drop in your credit score as the average account age decreases.
  • Debt-to-income ratio: Co-signing on a loan will also impact your debt-to-income ratio (DTI) as your debt will increase. The higher your DTI is, the more challenging it can be to secure future financial products. Keep this in mind if you plan to apply for other products soon after co-signing.
  • Long-term impact on credit: If the loan becomes delinquent or the vehicle is repossessed, your credit will take a significant hit. Late payments and repossessions stay on your credit report for up to seven years, but the impact diminishes over time.

Potential benefits

If you and the primary borrower handle the loan responsibly, you could both see credit score boost.

  • Credit mix: If you don’t currently have any installment loans, 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 from them making consistent on-time payments. Payment history makes up 35 percent of your credit score.

How having an auto loan co-signer affects the primary borrower’s credit

If you were denied an auto loan due to a limited credit history, adding a co-signer will not only enable you to purchase a vehicle but can help improve your credit score in the long run.

Getting a co-signer with stellar credit will likely improve your approval odds since the lender will assume less risk. Consequently, you could get approved for an auto loan and start building a positive credit history as you make timely payments on the loan.

A co-signer can also help you improve your credit score if it is low due to past financial missteps. Payment history accounts for 35 percent of your credit score, so keeping current on the auto loan payments over the loan term could help boost your score — assuming you manage all other debts responsibly.

When to be a co-signer on a car loan

Co-signing a car loan is risky and can damage your credit health if the loan isn’t responsibly managed. However, there are instances when being a co-signer makes sense:

  • Your relative or friend has a solid employment history and consistent income, and you’re confident they will make timely loan payments.
  • Your child has little or no credit history, and you want to help them build credit from scratch.
  • You can afford the monthly payments if the primary borrower falls behind.
Bankrate tip
Before agreeing to co-sign use an auto loan calculator to ensure you can afford the monthly payments in case the primary borrower cannot. Remember: the primary borrower has most of the responsibility, but you are ultimately on the hook for the loan as a co-signer.

When to have a co-signer on a car loan

A co-signer can help you get approved for a car loan with a competitive interest rate. If you don’t have the best of credit, you might need to take out a bad credit auto loan to get approved without a co-signer.

Here’s when it is ideal to bring a friend or relative on board:

  • You earn a stable income and can afford the monthly loan payment, insurance and maintenance costs that will come with the vehicle.
  • You consistently pay your bills on time and have money saved in case of a financial emergency.
  • You can’t get approved for a car loan due to a lack of credit history or previous mistakes.

The bottom line

A co-signing arrangement can mean bad news for your credit and overall finances if the loan payments aren’t made on time. Plus, valuable relationships can be strained, which could easily make the costs of co-signing outweigh the benefits. On the plus side, on-time payments can boost both parties’ scores.

Whether you’re considering co-signing a car loan or asking someone to co-sign on your behalf, consider all the risks and be sure to compare auto loan rates to ensure you secure one you can afford.