How does cosigning a car affect credit? Benefits and risks

Signing off as a cosigner on an auto loan can make vehicle ownership possible for a friend or family member who may not qualify for financing without your help. Bur cosigning comes with risk. Since both the primary borrower and cosigner are legally responsible, missed payments or default will affect your finances. However, if the vehicle owner is responsible, cosigning could improve your credit.

What is cosigning for an auto loan?

While similar, cosigning a loan and co-owning a car are two different processes. When you cosign a loan, you are responsible for making the payments if the primary borrower cannot make them. Being a cosigner does not mean you have any legal rights to the vehicle, and you are not included as an owner on the title.

Co-owning a car, on the other hand, means that both parties share equal legal responsibility for and ownership of the vehicle. Both options can have an impact on your credit score. If the loan is paid on time, it can improve your score. But if the loan is not handled responsibly, it can cause your score to decline.

How cosigning an auto loan affects the cosigner’s credit

Before agreeing to cosign, 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 cosigner.

Agreeing to cosign for an auto loan can make vehicle ownership a reality for someone 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 the biggest risks when you cosign an auto loan is damage to your credit score. Ideally, you should only assist a friend or family member you trust — someone with a consistent income who is financially stable. You will be responsible for paying the loan if the primary borrower isn’t able to. If you don’t, your credit score will take a hit.

• Initial credit score drop: Once you cosign a car loan, the hard inquiry generated during the application process could lead to a slight drop in your credit score. It will also reduce the average age of your accounts, which may also negatively impact your credit.
• Debt-to-income ratio: Cosigning an auto loan will count as new debt, increasing your debt-to-income ratio (DTI). 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 cosigning.
• Long-term impact on credit: As the cosigner, you are responsible for payments. If the loan becomes delinquent, or the vehicle is repossessed, your credit will take a significant hit. 

Potential benefits

If you and the primary borrower handle the loan responsibly, you could both see boosts to your credit scores.

• Credit mix: If you don’t currently have any installment loans, adding a car loan to your credit report could potentially improve your credit mix. 
• Payment history: Just as your score could decrease if the primary borrower doesn’t make timely payments, it’s possible for your credit score to improve if the primary borrower makes consistent, on-time payments. 
• Positive impact: Cosigning for a child, close friend or other family member has its share of risks, but you could have a positive impact on their finances by helping them qualify for a necessary loan.

When to be a cosigner on a car loan

Cosigning 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 cosigner 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.

How to protect your credit if you cosign a loan

Communication is key when cosigning an auto loan. Work with the primary borrower to create a budget and have them explain how they plan to remain on top of loan payments. Ideally, this should be done before you sign any paperwork.

Maintaining regular communication with the borrower can also help protect your financial profile. Ask the primary borrower to provide frequent updates about the loan status and any financial challenges they encounter.

In addition, have the lender send you monthly loan statements so you can monitor the status of the account. If the primary borrower does miss a payment, you can address the problem before it impacts your credit score.

How having an auto loan cosigner affects the primary borrower’s credit

If you have been denied an auto loan due to a limited credit history, adding a cosigner to your application can help you qualify. It may also improve your credit score in the long run — provided you responsibly manage your auto loan. 

• Increase your approval odds: Applying with a cosigner who has good 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.
• Improve your credit score: A cosigner 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 have a cosigner on a car loan

A cosigner can help you get approved for a car loan with a competitive interest rate. Without a cosigner, you may need to take out a bad credit auto loan if you have a low credit score or a limited credit history.

You may want to consider asking a friend or relative to cosign for you if you are unable to qualify for a car loan due to a lack of credit history or previous mistakes. You should have a stable income and be able to afford the monthly loan payment, insurance and maintenance costs that will come with the vehicle on your own.

If you aren’t able to consistently pay your bills on time, and you don’t have money saved in case of a financial emergency, it may be better to work on your financial situation before asking someone to cosign an auto loan for you.

Bottom line

A cosigning 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 cosigning outweigh the benefits. On the plus side, on-time payments can boost both parties’ scores.

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