The biggest risk of co-signing for another person's auto loan is the amount of damage it might cause to your credit. As a co-signer, an auto loan affects your credit the same as it would if you borrowed the loan by yourself. Consider the risks to your credit and finances before you decide to take on the role of a co-signer.
Late Payments
Any time the person you co-signed for pays his auto loan payment late by more than 30 days, the lender reports the instance to the credit bureaus. Your credit report lists the lender's name, your original account balance, loan term and current balance. Next to this account information is a code that lists late payments and the number of times the payment was reported as late. For example, if the borrower pays 30 days late three times, your credit report shows "30 3," which is viewed by potential lenders. Each late payment lowers your credit score and remains on your credit report for at least seven years.
Repossession
If the borrower doesn't abide by the terms in the contract you signed, such as making timely payments or maintaining full coverage insurance, the lender can repossess the vehicle. A repossession significantly damages your credit score and also remains on your credit report for a term of seven years. Once the lender seizes the vehicle, it will resell it and bill you and the borrower for the amount due on the loan. You must pay the remaining balance to avoid additional consequences for non-payment.
Wage Garnishment and Tax Issues
If you or the borrower don't pay the remaining loan balance, the lender will likely sue you. If the lender wins its case, it can pursue a judgment, which is listed on your credit report, and wage garnishment. Your lender may offer to settle the loan balance, but this also affects your finances. For example, if you settle a $8,000 balance for $3,000, the Internal Revenue Service considers the non-paid amount of $5,000 as taxable income. You must report the income on your taxes and pay the amount due to avoid further credit damage. A tax lien remains on your credit report for 10 years.
Debt-to-Income Ratio
The person you co-signed for might pay all her loan payments on time, but you might find it difficult to obtain another line of credit for yourself. Since the debt is listed on your credit report and you're just as responsible for the payment as the other borrower, your debt-to-income ratio decreases. Potential lenders review your credit report to determine the amount of debts you're responsible for paying and compare the amount with your income. You might find yourself declined for other lines of credit because of your debt responsibility.
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