Should I Cosign an Auto Loan?
Before cosigning an auto loan, make sure you understand exactly what that means for you, your finances, and your credit score.
Cosigning an auto loan can present a lot of serious risks with few protections. Before you make any financial commitments, you should have a clear understanding of what you're signing up for, so you can make the best decisions for both you and your cosigner.
What Is Cosigning on a Car Loan?
Cosigning is a contractual promise to take on the responsibility for an auto loan. When you cosign for a car loan, all of your financial information is added to the loan, including your identity, address, credit score, income, assets, and debts. Rather than approving a loan based only on the information provided by the primary borrower, the lender uses your combined information to determine whether they should loan money.
Who qualifies as a car loan cosigner will vary based on the lender, but in most cases, it can be anyone close to the borrower. You could be a family member, friend, or even a boss or coworker.
Being a cosigner isn't just a reference or recommendation; it's a contract between you and a lender, putting you on the hook for the full amount of the loan in a worst-case scenario where the primary borrower isn't able to pay.
Why Borrowers May Need Cosigners
A car loan cosigner is only required when borrowers cannot be approved for a loan without one. If a borrower qualifies for the loan they are requesting, even at worse rates or with less favorable terms, the lender cannot require them to find a cosigner. However, the borrower may still want to add a cosigner to their loan if they have a weaker credit application in order to qualify for better financing rates, longer terms, or other benefits that may not be available based solely on their own credit and financial information.
The Benefits of Cosigning a Car Loan
Cosigning doesn't typically give you as the cosigner any ownership rights to the property purchased with the loan. Instead, the potential benefits for cosigning are usually intangible. These can include:
- Helping a child or family member build credit
- Helping out someone close in a tough financial situation
- Helping a loved one reduce their total cost of borrowing by securing better terms
- Improving your credit score if the loan is paid on time
If you're considering cosigning, you should think carefully about what you get out of the deal and whether that outweighs the risks.
The Risks of Cosigning a Car Loan
As a car loan cosigner, you don't typically have any legal claim to the property being purchased with the loan you're cosigning for. This creates a lot of risk — you are just as responsible for the loan as the primary borrower is, without receiving the benefits of ownership.
A cosigned car loan will appear on your credit report. Even in a best-case scenario, this may make it more difficult for you to borrow in the future because it raises your debt-to-income ratio. In a less ideal scenario, if the primary borrower misses payments without letting you know, your credit score will take a hit once the missed payment is reported to the credit bureaus.
In an absolute worst-case scenario, if the primary borrower lets the loan become delinquent, the lender has the same rights to collect from you as they do from the primary borrower. This can include:
- Reporting the delinquencies on your credit report and lowering your credit score
- Suing you for the unpaid balance
- Using collections agencies to pursue you for the money
- Garnishing wages in the event of a judgment
The lender even has the right to try to collect from you without trying to collect from the primary borrower if, for example, they can't locate the primary borrower or don't believe they will be able to collect from them. They are in fact not required to make any effort to collect from the primary signer before pursuing collections actions against you, putting the entire loan on your financial shoulders.
Cosigning an auto loan isn't just a temporary or short-term helping hand for the primary borrower. It can be extremely difficult to be removed as a cosigner and is entirely up to the discretion of the lender-borrower. Doing so almost certainly requires a new credit check on the primary borrower to show they are able to handle the loan on their own, and the only guaranteed way for you to be removed as a cosigner is a successful refinance.