When co-signing an auto loan, your credit and income secure the auto loan and terms for another person. You'll also become a co-owner of the vehicle you sign for, so the title will list both of your names. Once you sign bank contracts, you become just as responsible for the auto loan as the person for whom you co-sign, resulting in financial and credit risk if the borrower defaults on the loan.
Why a Borrower Needs a Co-signer
A borrower who can't obtain a loan approval on his own can use a co-signer for an approval. Or, if the borrower has poor or no credit, his loan approval might require a large down payment, high interest rate and restricted loan term, which results in a high monthly payment. As the loan's co-signer, your income and credit history secures the term of the loan. The borrower might obtain a lower interest rate or a less restrictive loan when using your credit to secure the loan terms.
Co-signing Process
Once you agree to co-sign an auto loan, expect to give your credit and personal information to the auto loan provider. Provide your Social Security number, name, address, date of birth, income, address and employment information for the loan application. Once approved for the loan, provide the lender or dealership with a copy of your driver's license and most recent pay stub, if required. You and the person for whom you co-sign sign loan contracts as a final step to establish the loan.
Credit Considerations
Even though you aren't the person paying the loan payment or driving the vehicle, your credit states otherwise. The credit bureaus receive note of your new auto loan account as if the loan were your own. The total amount of the loan increases your debt-to-income ratio, or the amount of debts you're responsible for versus your income. Opening a new loan account decreases your credit score until a history of timely payments and smaller balance are reported.
Risks
Depending on your income and debt responsibilities, you might not obtain additional lines of credit after co-signing an auto loan because of your debt-to-income ratio. If the borrower defaults on the auto loan, your credit score decreases. All late payments are reported on your credit report. If the vehicle is repossessed at a later date, you are responsible for paying the remaining loan balance after the lender resells the vehicle. The lender can sue you and the co-owner for nonpayment if you don't pay the balance due, which can result in wage garnishment. A repossession remains on a credit report for at least seven years.
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