Does Cosigning for a Car Affect Your Credit?

Cosigning a car loan means taking on legal responsibility for the debt alongside the primary borrower. This commitment has direct implications for your financial standing. Understanding how this role impacts your credit is important before you agree to cosign.

How Cosigning Appears on Your Credit Report

When you cosign a car loan, the initial loan application triggers a “hard inquiry” on your credit report. A hard inquiry can cause a small, temporary dip in your credit score, typically a few points, though scores often rebound quickly with continued responsible credit behavior.

The car loan itself will then appear on your credit report as a new account, reflecting details such as the loan amount, the lender’s name, and the date it was opened. This entry shows that you are equally responsible for the debt, just as if you were the primary borrower. Consequently, the full outstanding balance of the loan will be reflected on your credit report. Moreover, the payment history for this loan, including both on-time payments and any missed payments, will be reported to credit bureaus for both you and the primary borrower.

Influence on Your Credit Score

The presence of a cosigned car loan on your credit report can influence your credit score in several ways. The new loan increases your overall reported debt, which can impact your credit utilization ratio. This ratio compares the amount of credit you are using to the total credit available to you, and a higher ratio can negatively affect your score.

Payment history is a significant factor in credit score calculations. On-time payments on the cosigned loan can build positive credit for both you and the primary borrower. Conversely, if the primary borrower misses payments, these will negatively impact your credit score as if you had missed them yourself.

Effects on Your Debt-to-Income Ratio

Cosigning for a car loan also impacts your debt-to-income (DTI) ratio, a measure lenders use to assess your capacity to manage monthly payments.

Crucially, even if the primary borrower is making all the payments, the monthly obligation of the cosigned car loan will typically be included in your DTI calculation by potential lenders. An elevated DTI can make it more challenging for you to qualify for other loans in the future, such as a mortgage or another vehicle loan. Lenders may view a higher DTI as an indicator of increased risk, potentially leading to less favorable interest rates or even loan denials.

The Impact of Missed Payments

The most severe consequences for a cosigner’s credit arise when the primary borrower fails to make payments. As a cosigner, you are equally responsible for the loan, meaning the lender can pursue you for repayment if the primary borrower defaults. If the primary borrower misses payments, these late payments will be reported to credit bureaus and appear on your credit report, directly damaging your credit score. This damage occurs regardless of whether you were aware of or involved in the missed payment.

The severity of the impact escalates with the lateness of payments, such as those 30, 60, or 90 days past due. Negative marks from late payments can remain on your credit report for up to seven years, significantly hindering your ability to obtain new credit or secure favorable terms during that period. In cases of severe delinquency, the lender may pursue collection efforts against both the primary borrower and you, the cosigner, which could lead to further credit damage through charge-offs or collection accounts. Lenders can even pursue legal action, potentially leading to wage garnishment or attachment of bank accounts to collect the outstanding debt.