Manage Money

Effect of Co-signing Car Loan on Credit Score

Maybe you know someone, a family member or a friend, who needs to purchase a car but cannot do so due to their bad credit score. They really need someone to cosign their car loan. They call you one day since they know you have an impeccable credit score, and now they want you to co-sign their auto loan. 

They tell you that this is only a formality, and even promise that their payments to you shall always be on time. You trust and love the person and really want to help them. We know you do, but we would also like you to know that there are certain obligations and risks involved.

Don’t jump in just because a loved one is telling you to do this, since this is a matter of your money. If you lose, it shall be your loss alone. Your concerned loved one won’t be able to help you out. Your credit score may take a hit, which can mean you won’t be able to take loans easily next. Looking out for yourself does not make you selfish. Only when your wealth grows and is protected can you help others.

What does co-signing an auto loan mean?

First of all, it is important to know what you’re getting yourself into. What does it mean to cosign an auto loan? It meanTs that you’ll share the responsibility of repaying the loan on time, just as if it were your loan. If your loved one, family member or friend cannot repay the loan, you are obligated to repay it.

A co-signer of the loan is obligated to repay the loan if the primary borrower is unable to do that.

How does it affect your credit?

There are two ways in which co-signing a car loan, or any loan for that matter, can affect your credit. The first way is my affecting your credit score. You, as a co-signer of the loan, are obligated to repay the loan if the primary borrower is unable to do that. In such a case, it shall be entirely your responsibility. A co-signed loan will be seen on your credit report, as if you have taken the loan. If the primary borrower makes a late payment, your credit report and score will be affected. And you know what low credit score means.

Here’s one thing to keep in mind. You are not the main or primary borrower, and thus won’t get monthly statements or late payment notices. You might now even know about your lowered credit score unless you keep getting credit reports every couple of months or so. You may want to get a new credit card yourself and be unpleasantly surprised. Due to the primary borrower’s missed payments, you are not able to get a new credit card or loans when you need them most.

The second way it affects you is by affecting your ability to get a loan. As we said before, due to the primary borrower not making timely payments or missing them entirely, your credit score will be affected. Too much of that, and you yourself won’t be able to get new loans. Pretty infuriating, right? 

When is it a good time to be a co-signer?

Believe it or not, there is actually a good time for doing this. It is when you have no credit score, which is different from a negative or low credit score by the way. It is also a good time to do this when your primary signer is well-to-do. 


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