Cosigning a Car: What You Need To Know
Written by
Jacob Wade
Edited by
Melanie Grafil
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If you have a friend or family member looking to buy a car — and they’ve requested you as a cosigner — this can help them secure a car loan and get a lower rate. There are risks associated with cosigning on a car, though, which could potentially put your credit score at risk and hurt you financially.
Here’s what you need to know before cosigning on a car loan.
What Does It Mean to Cosign a Car Loan?
When you cosign on a car loan, you are agreeing to take financial responsibility for the loan if the primary borrower cannot make payments. This helps give lenders more confidence in the loan and can help the main borrower obtain a car loan — even if they have poor credit, limited credit history or unstable income.
This also means, though, that if the borrower fails to make on-time payments, it will directly affect your credit score. If the loan goes into default, the lender is legally allowed to go after you to collect on the debt. You should fully trust anyone that you choose to cosign on a car loan for.
How Cosigning a Car Loan Works
The process of cosigning on a car loan includes providing your personal and financial information, including your Social Security number, on the car loan application.
The lender will evaluate both the borrower’s and your credit score, credit history and income to determine if the loan is approved — and what interest rate to charge.
As the cosigner, you don’t legally own the vehicle, but you are legally responsible for the loan. This means if the main borrower fails to make payments, it’s on you to pay back the loan. Missed payments or defaulting on the loan will hurt both the borrower’s and your credit if you cosign.
Who Typically Needs a Cosigner?
While most car loans don’t have a cosigner, some borrowers could benefit from a cosigner. This includes:
- Young buyers with no credit history. Most 18-year-olds and college students don’t have much of a credit history. A cosigner can help them qualify for a car loan even though their score and history are not sufficient.
- People with low credit scores. Borrowers who have had issues with past debt or missed payments might not be able to qualify alone. A cosigner can give lenders confidence to approve a car loan with a cosigner.
- Individuals with unstable income. Borrowers who have unstable employment or a high debt-to-income ratio may not qualify for a loan and need a cosigner.
- Those seeking better loan terms. Even if someone qualifies for a car loan, if they don’t have the best credit or income, the interest rate may be very high. Getting a cosigner can lower their monthly payment and interest rate on the car loan.
Pros and Cons of Cosigning a Car Loan
Cosigning can help a friend or family member finally qualify for a car, but it can put your credit score and finances on the hook if they fail to repay the loan. Here are a few pros and cons of signing to consider:
| Pros | Cons |
|---|---|
| Helps the borrower get approved | Cosigner is responsible for missed payments |
| Can lead to lower interest rates | Affects cosigner’s credit score |
| Builds credit for the primary borrower | Can make it harder for the cosigner to get loans |
| Strengthens relationships if handled well | Loan debt may cause financial strain |
Risks of Cosigning a Car Loan
There’s no denying that cosigning a car loan comes with quite a few risks. Here are a few to consider before signing on the dotted line:
- Credit impact: If the borrower fails to make payments or if the loan goes into default, this can severely damage your credit score.
- Debt liability: If the borrower fails to repay the loan and it defaults, you are now responsible for repaying the loan as the cosigner.
- Limited financial flexibility: When you cosign on a car loan, it counts as your debt, which can affect your debt-to-income ratio and affect your ability to get other loans.
- Strained relationships: If you are a cosigner on a car loan for a friend or family member and they start missing payments, it can hurt your relationship and cause issues between you two.
How To Protect Yourself as a Cosigner
If you choose to cosign a car loan, there are a few steps you can take to protect yourself — and your credit — from being damaged:
1. Review the Loan Terms
Make sure to review the details of the loan, including interest rates, repayment terms and what happens if the borrower stops paying on the loan.
2. Check the Borrower’s Financial Stability
Don’t just sign on the dotted line. Make sure your friend or family member is someone you trust. They should be in good financial standing and have the income and accountability to make on-time payments.
3. Set Up Payment Alerts
As a cosigner, you can set up alerts for when payments are due and when payments are made. This can help you monitor payments to avoid late or missed ones.
4. Consider a Cosigner Release
Some lenders allow cosigners to be removed after a certain number of on-time payments. This is a good idea to release you from the loan’s liability after the borrower proves they are capable of handling the payments.
5. Have a Backup Plan
If you’re the cosigner on a car loan, you need to be fully prepared to pay for the loan should the borrower become unable to make payments. Otherwise, you’ll hurt your credit score and have a tough time borrowing in the future.
How Cosigning a Car Loan Affects Your Credit
When you cosign for a car loan, it can impact your credit score in the same way as if you had applied for the loan yourself. Here are a few ways it can affect your credit:
- Credit inquiry: As a cosigner, the lender will check your credit. A hard credit check may slightly lower your score temporarily.
- Debt-to-income ratio: When you cosign on a car loan, it is added to your credit report. This can increase your debt-to income ratio and potentially affect future loan approvals.
- Payment history: As with any loan, cosigning on a loan means that payments affect your score. On-time payments can help your credit score, but late payments will hurt your score.
When Should You Say No to Cosigning?
Cosigning may help someone you love get into a car, but it’s not always a great idea. Here are a few reasons to avoid signing and say “no” if someone requests that you cosign on a loan:
If you can’t afford to take over payments. You need to ensure you can manage the car payment should the borrower become unable to pay. If you can, you should not cosign on the loan.
If the borrower has a history of missed payments or financial struggles. Even if they are a friend or family member, if the borrower has a poor history of keeping up on payments or unsteady income, you shouldn’t cosign the loan.
If you need to apply for your own loans in the future. If you are planning on getting a new car, buying a home, or need to apply for any other type of loan soon, cosigning can affect your eligibility.
If there’s no cosigner release option available. If a cosigner’s release is not available, you’re on the hook for the entirety of the loan. This can affect your debt-to-income ratio and eligibility for future loans, so having a release is important.
Alternatives to Cosigning a Car Loan
Cosigning is not the only option to help someone get a car loan. Here are a few alternatives to cosigning a car loan for someone:
You can help your friend or family member improve their credit by showing them how to budget, set up auto-pay for bills and pay down debt. You might also consider a financial gift to help them purchase a vehicle instead of borrowing to purchase a car.
Some lenders offer secured car loans where the borrower provides collateral. This may include pledging something like another vehicle or another personal asset. This can help borrowers with poor credit obtain a vehicle loan to purchase a car without a cosigner.
Finally, you might encourage your friend or family member to simply save a bit more money for a larger down payment. This can help increase their car loan approval chances without needing a cosigner.
Final Thoughts: Should You Cosign a Car Loan?
Cosigning on a car loan can help someone you know be able to buy a car. But there are several financial risks to consider before cosigning for someone — including the potential for hurting your credit score and ability to apply for future loans.
You truly need to trust the person you’re cosigning for completely before signing on the dotted line. Make sure you have a plan in place if something goes sideways and you’re on the hook for the loan balance.
FAQs on Cosigning a Car
Here are answers to some of the most frequently asked questions about cosigning a car.- Can I remove myself as a cosigner later?
- Some lenders offer a "cosigner's release" that can remove you as a cosigner in the future once the loan balance reaches a certain level, or when the borrower makes a certain number of on-time payments.
- Does cosigning affect my credit score?
- Cosigning can hurt your credit score due the hard inquiry on your credit report and the loan balance showing up on your credit report. This increases your debt-to-income ratio and can lower your score.
- What happens if the borrower doesn't make payments?
- When you cosign on a loan and the borrower doesn't make payments, it will directly hurt your credit score. If the borrower ends up defaulting on the loan, you'll be responsible for making loan payments.
- Can a cosigner take ownership of the car?
- In most cases, no. The law varies by state, but usually only the main borrower is on the title of the vehicle and the cosigner has no legal right to repossess the vehicle. However, if the borrower defaults on the loan, some states allow the cosigner to take possession of the vehicle.
- Do all lenders allow cosigners on car loans?
- No, not all lenders allow cosigners on car loans. You'll need to work with a lender that specifically supports cosigners to be able to cosign on an auto loan.
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- Consumer Financial Protection Bureau. 2023. "Should I agree to co-sign someone else’s car loan?"
