How a Car Loan Affects the Credit of a co Signer

Lenders make decisions about whether to approve a loan based on a number of factors.  One of the biggest is the predicted likelihood that a person will be able to repay the loan, or will fail to pay and default on the loan.  Coming to that conclusion requires looking at the amount that is going to be borrowed, the income of the borrower, and the credit history of the borrower.  If the numbers don’t add up, and the lender is just unwilling to make the loan, they might suggest finding a co-signer.  A co-signer is a person who agrees to be responsible for a debt if the primary borrower fails to pay.  If you are thinking of finding a co-signer, or somebody has asked you to be a co-signer, there are a number of concerns that you should have about how that car loan will affect the co-signer’s credit history.

The immediate impact of being a co-signer will occur even before the loan is made.  When the borrower returns to the bank or dealership with the name of the potential co-signer, the lender will want to know whether this person can reduce their concerns about default.  This means that the lender will run a credit check for the purpose of extending credit to the co-signer, and this check will appear on the co-signer’s credit report.  It will almost definitely lower the co-signer’s numerical credit score because one factor in determining the score is whether recent credit applications have been made.

Assuming that the lender agrees to allow the co-signer to guarantee the loan, there are two ways that the agreement might be written.  The most common way, and the one that you should expect, is that both borrowers will be listed as co-borrowers for the loan.  This means that the loan will immediately appear on both borrowers’ credit reports as an active debt, and any missed or late payments will be reported on both borrowers.  This will impact the co-signer’s credit exactly the same as it does the primary borrower.  If the co-signer is planning to apply for other loans over the course of the auto loan, the other lenders will take the car loan obligation into consideration when deciding whether to approved the loan.  The auto loan might prevent the co-borrower from qualifying for a mortgage or their own car loan, or for home repair loans.

In rare occasions, a lender might agree that a co-signer is signing only as a guarantor of the loan, and not a true co-borrower.  In that case, the lender might agree not to report the debt to the credit agencies as long as the primary borrower is making payments on time.  The lender would only involve the co-signer if the primary borrower defaulted.

Default is the area where being a co-signer will have the biggest and worst effect on the co-signer’s credit.  The lender will often only mail one statement a month, so the co-signer might not even be aware that there is a problem in the works.  If the lender is reporting the debt to both borrowers’ credit files, the late payments and delinquencies will immediately impact the co-signer’s credit score and the damage will last for years.  The same is true for a default or charge off.  This will not prevent the lender from coming after the co-signer for the balance on the loan, even if the primary debtor files for bankruptcy.  That is exactly the reason why the lender wanted that second name on the papers: to hold the co-signer accountable for the debt regardless of what the primary borrower did.

Co-signing a car loan will have immediate and long term effects on the co-signer’s credit.  Before signing, the co-signer should have a long discussion with the primary borrower and the lender to figure out why a co-signer is needed, what the terms of the agreement will include, and how the co-signer can be kept informed of the status of the debt so that the impact to the co-signer’s credit can be minimized.