How does co-signing a car affect credit?

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 important 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 goes into default. The upside is that the auto loan can also 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, your credit could be slightly affected by the hard inquiry generated during the application process. You could also see a slight drop in your credit score as the average age of accounts will decrease. Still, your credit could improve if timely payments are made on the loan since it will add positive payment history to the credit report.

But if the primary borrower cannot make payments and the co-signer doesn’t pick up the slack, your credit score will take a hit. Furthermore, you could have trouble qualifying for loans and credit cards in the future.

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.

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

Were you denied an auto loan due to 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 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 can be risky and damage your credit health if it isn’t responsibly managed. However, there are instances when being a co-signer makes sense:

• Your relative or friend has a solid employment history, consistent income and you’re confident that they will make timely loan payments.
• Your child has little to no credit history, and you want to help them build credit from scratch.
• You can afford to make 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

Whether you’re considering co-signing a car loan or asking someone to co-sign on your behalf, consider all of the risks before proceeding.

There are several essential factors to keep in mind. Both arrangements can mean bad news for your credit and overall finances if financial hardship arises, and loan payments aren’t made on time. Plus, valuable relationships can be strained, which could easily make the costs of co-signing an auto loan or getting a co-signer outweigh the benefits.