Key takeaways

  • It is best only to co-sign for a close friend or relative who can reliably manage their finances. Otherwise, future financial and interpersonal issues could be in your future.
  • Co-signing on a car loan can potentially hurt your credit if you or the primary borrower default or make 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.

Do you have a relative or friend who has asked you to co-sign a car loan? Or maybe you are having trouble getting approved for an auto loan and need a co-signer?

In either case, it’s essential to understand that both the primary borrower and co-signer are legally responsible for the auto loan payments. And both parties could face severe credit consequences if the loan defaults. The upside is that the auto loan can boost the borrower and co-signer’s credit health if managed responsibly.

How co-signing an auto loan affects the co-signer’s credit

When co-signing 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 age of accounts will decrease.

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.

And, of course, your credit score will take a bigger hit if the primary borrower cannot make payments and you do not step in to pay instead.

Once the loan reaches 30 days past due, it may be reported by the lender to the major credit bureaus — Experian, TransUnion and Equifax — and tank your credit score. If the loan remains delinquent and the vehicle is repossessed, the co-signer’s credit score will take an even more significant hit. Unfortunately, late payments and repossessions stay on your credit report for up to seven years, but the impact diminishes over time. In the meantime, you could have trouble qualifying for loans and credit cards.

On the other hand, your credit could improve if timely payments are made on the loan since it will add a positive payment history to the credit report.

Bankrate tip

The lender is not responsible for informing the co-signer if the primary borrower fails to make payments. It is best to closely monitor the account and ensure no payments are skipped.

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

Were you denied an auto loan due to your limited credit history? 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.

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. 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 set up safeguards before proceeding.