How Cosigning an Auto Loan Affects Your Credit

What Does It Mean to Cosign an Auto Loan?

When you cosign a car loan (or any other kind of loan), you're effectively lending your creditworthiness to the primary borrower. As a cosigner, you're guaranteeing the loan will be repaid by promising to cover the payments yourself if the primary borrower cannot or does not.

Learn more: How Does Cosigning Affect Your Credit?

How Cosigning an Auto Loan Impacts the Cosigner's Credit

When you're a cosigner, the loan and its payment history appear on your credit reports as well as the reports that belong to the primary borrower. As long as payments are made on time, the positive payment history will tend to benefit credit scores for both of you. If the primary borrower fails to make the payments, however, your credit scores will suffer along with theirs—and the lender will have the right to come after you for payments.

Here's a more detailed rundown on the pros and cons of cosigning an auto loan.

Learn more: What Credit Score Does a Cosigner Need?

When to Cosign an Auto Loan

Here are some circumstances under which it might make sense to cosign an auto loan.

• You're helping a responsible friend or relative. Sharing your good credit to help a child, grandchild or significant other get safe, reliable transportation can be a great reason to cosign a car loan. Take care that the loan and payments won't be too much of a financial stretch for the primary borrower—and that they'll give you plenty of notice if they won't be able to make a payment.
• You can afford to cover payments if necessary. No matter how trustworthy you consider the primary borrower, you shouldn't cosign a loan unless you're prepared to assume monthly payments. While it may be possible to sell the car without having to pay off the entire loan in full, forcing a sale without the primary borrower's cooperation could require costly legal action.
• You're involved in the vehicle's use or ownership. It's not essential that you benefit directly from a vehicle financed through a loan you cosigned, but it's a good idea to keep tabs on the vehicle. Since the vehicle serves as collateral on the loan, it protects your interest to make sure the vehicle is kept in good condition in case it must be sold to cover the balance on the loan.

Learn more: Can a Cosigner Be Removed From a Car Loan?

How a Cosigned Auto Loan Impacts the Primary Borrower's Credit

For primary borrowers too inexperienced to have built up solid credit scores, or with negative events in their past that cause their scores to suffer, a cosigner can put them in the driver's seat of an auto loan they otherwise wouldn't qualify for. Here's how cosigning an auto loan can affect a primary borrower.

• Easier loan approval: A cosigner can enable a borrower to land a loan when their application would otherwise be turned down, due to low credit scores or lack of income history.
• Better loan terms: Even if a borrower qualifies for a car loan, a co-borrower could help them borrow a greater amount than they'd be approved for on their own and lower their interest charges, resulting in significant savings over the life of the loan.
• Opportunity to build credit: Making regular payments on the car loan will help the primary borrower build (or rebuild) their credit scores by generating a positive payment history. The addition of a car loan to their credit profile could also improve credit mix, further contributing to credit score improvement.

The Bottom Line

Cosigning an auto loan can be a great way to enable someone you love to finance a car they couldn't otherwise afford. However, becoming a cosigner carries risks and potential rewards for your credit scores, so prepare for the worst case scenario of loan default before you cosign. To get an idea how lenders will view your creditworthiness, and to track any impacts the new loan has on your credit scores, you and the primary borrower can both check your FICO^® Score for free with Experian.