Standing as guarantor to co-sign a car loan is as precarious as co-signing for any other financial transaction. A co-signer basically agrees to honor the payments if the primary borrower fails to do so, and should be aware of the affect it can have on their credit. It is only sensible to co-sign for any loan if the co-signer is in a position to make the loan payments if the primary borrower fails to do so, as the lender will most probably find them an easier target to pursue for late or defaulted payments.
Car loans are most usually secured with the vehicle standing as collateral. However even with security some lenders are reluctant to advance a loan to those with either no credit history or bad credit. If someone already has bad credit and needs a willing co-signer as the only available means to obtain the loan, then the potential co-signer should consider that the primary borrower is not a good risk and may well fail to honor the loan. Many co-signers find themselves ultimately responsible for the loans they guarantee.
The first way in which co-signing a car loan affects the guarantors credit is it shows as a loan obligation on their credit report. This will then reduce the available amount of credit that the co-signer will have available. Thus this could affect their ability to obtain a loan of their own, or other credit options, whilst the loan is outstanding.
Co-signing a car loan will have no other affect on credit providing the primary borrower meets all their payments on time and the loan is paid off in full. However if a payment is made late or missed then the lender has every legal right to pursue the co-signer for the delinquent payment. If the co-signer fails to pay on behalf of the primary borrower then their credit report will record the missed payment and will have a negative affect on their credit score. The co-signer will have had a good credit report when guaranteeing the loan and this can be lost as their credit score falls.
In many instances the primary borrower simply fails to make the payments and the co-signer ends up paying the loan in order to protect their own credit. However the co-signer could in theory make some or all of the entire loan payments, but have no right to the vehicle as this remains the possession of the primary borrower who is driving around regardless of their own non payment. The primary borrower holds the car title and thus legal ownership of the vehicle.
If the co-signer either cannot or does not make the loan payments when the primary borrower defaults then the car can be subject to repossession. Both a default and repossession will be recorded on the co-signers credit report. Once the vehicle is repossessed the co-signer is still on the hook if there is an outstanding balance to be collected on. The lender can take legal action to recover this debt, penalty charges and legal costs, or may pass it to outside collections to pursue. The co-signer may find themselves dealing with collections agencies or sued for the debt. A court judgment can be issued against the co-signer which will further adversely affect credit.
It is only ever prudent to co-sign a loan which the guarantor is prepared to take over if the primary borrower fails to meet their loan obligations. If a car loan is co-signed by a third party for a young person who has no credit history, it can help the borrower to establish a credit history if payments are made in a timely fashion, but the guarantor should always be aware of the potential risks to their own credit.