Can I Cosign for a Car? Requirements & Risks

Cosigning for a car loan is a financial arrangement that allows individuals with limited or developing credit histories to secure financing for a vehicle. This process typically involves a second party, known as the cosigner, who agrees to take on shared responsibility for the loan. Often, those seeking a cosigner may not meet a lender’s standard eligibility criteria, such as having a sufficient credit score or stable income, making the cosigner’s involvement a necessary step to obtain approval. The cosigner’s stronger financial profile helps mitigate the lender’s risk, facilitating the loan approval process for the primary borrower.

Defining Cosigning for a Car Loan

Cosigning a car loan means you become legally obligated to repay the entire debt if the primary borrower fails to make payments. This commitment signifies equal responsibility for the loan, even without vehicle ownership rights. Unlike a co-borrower, whose name appears on the car’s title and shares ownership, a cosigner’s role is solely financial. This arrangement places the cosigner in a position of significant financial liability for the loan term.

Requirements to Qualify as a Cosigner

Lenders assess potential cosigners using criteria similar to those applied to primary borrowers, as the cosigner acts as a financial safeguard. A strong credit score is a primary requirement, with a FICO Score of 660 or higher, ideally 700 or more. Lenders also evaluate the cosigner’s income stability and ability to afford payments if the primary borrower defaults. This assessment includes analyzing the cosigner’s debt-to-income (DTI) ratio (monthly debt obligations compared to gross monthly income). A DTI ratio below 43% is considered favorable, indicating sufficient financial capacity, and cosigners may also need to provide proof of identity and residency during the application process.

Impact on Your Credit and Finances

Cosigning a car loan has direct implications for your personal credit and financial standing. The loan will appear on your credit report, just as it does for the primary borrower, influencing your credit profile. If the primary borrower consistently makes on-time payments, this positive payment history can contribute to an improvement in your credit score. However, any missed or late payments by the primary borrower will negatively impact your credit score, potentially causing a significant drop. This negative mark can remain on your credit report for several years, making it more challenging to secure future credit.

Additionally, cosigning increases your debt-to-income (DTI) ratio, as the loan’s debt is factored into your total obligations. A higher DTI ratio can limit your ability to obtain other forms of credit, such as a mortgage or personal loans, because lenders may perceive you as a higher risk. Even a hard inquiry on your credit report during the loan application process can cause a slight, temporary dip in your credit score. Therefore, while cosigning can help another individual, it introduces a significant financial obligation that can affect your own borrowing capacity and financial flexibility.

Actions if Payments are Not Made

If the primary borrower fails to make car loan payments, you are responsible for the entire outstanding debt. The lender is not obligated to pursue the primary borrower first and can directly demand payment from you. Each missed payment by the primary borrower will be reported to credit bureaus, causing negative entries on your credit report and damaging your credit score. These delinquencies can lead to collection efforts, with collection agencies contacting you for the unpaid amounts.

In cases of non-payment, the vehicle may be repossessed, which will be noted on both your credit report and the primary borrower’s, further impacting credit scores. Even after repossession, if the sale of the vehicle does not cover the full loan balance, you remain responsible for the deficiency, including any late fees and collection costs. Lenders can pursue legal action against you for the unpaid balance, potentially leading to lawsuits, wage garnishment, or other collection remedies. A cosigner should understand these consequences and be prepared to step in to prevent further financial and credit damage.