How Will Co-signing an Auto Loan Affect Your Credit?

If you co-sign an auto loan, you are just as responsible for the loan as the person with whom you co-sign. The loan is reported to the credit bureaus as if it were your own loan. If your co-signer defaults on the loan, it affects your credit. You might have trouble taking out your own car loan or obtaining a line of credit.

Debt-to-Income Ratio

If you co-sign for a loan, you probably aren't the one who will make monthly payments. Your credit report states otherwise. Because you co-signed the loan, the account goes on your credit report, showing the monthly payment the loan requires and the balance left of on the loan. Potential lenders consider a borrower's debt-to-income ratio, which is the amount of money you make versus the amount of money you pay out each month. If you apply for another car loan for yourself, your application might be declined because you already have an auto loan responsibility.

Credit Score

Until the person you co-sign for starts to pay down the loan, your credit score will drop because of the new line of credit and length of time on the account. In time, a positive payment history can improve your credit and increase your score. However, if your co-signer doesn't make his payments on time, your credit score will decrease and your credit report will show a history of late payments, which can affect your future borrowing opportunities.

Future Loans

If your debt-to-income ratio is unfavorable to other lenders because of the co-signed loan, you might still obtain another loan approval but at a higher interest rate or with term restrictions. If you don't make enough income to afford another car payment, you might not obtain an approval at all. Future lenders might view you as a risk. If so, a lender might require a down payment before extending a loan or restrict your loan term to increase equity in a vehicle, which results in a higher monthly payments.

Warnings

Before you co-sign for a loan, make sure you understand your responsibility for it. If your co-signer does not pay for the vehicle, it will be repossessed. You might be able to take on the car payments yourself to get the car back, but if not, your credit will suffer. Obtaining a loan approval after a repossession is difficult. The repossession will remain on your credit report for seven years. The lender can also sue you and garnish your wages if your co-signer doesn't pay the bank for its loss after repossession.