How Credit is Impacted when you Cosign a Car Loan

How Credit is Impacted when you Cosign a Car Loan

Posted on July 13, 2021

We often talk about using a co-signer to help you get a cheaper Smithville car loan if you have less than perfect credit. But we rarely talk about how credit is impacted when you cosign. That’s what we’re going to explore today.

Our Smithville auto loans team explains how credit is impacted when you cosign a car loan, and what it means for future borrowing.

Co-signing a car loan in Smithville

Co-signing a car loan is a gesture of trust and goodwill. If someone you know is having difficulty getting approved for a loan in Smithville, helping them out by co-signing it can make all the difference.

We think offering to co-sign a loan is a genuine expression of goodwill and a lovely thing to do for someone.

It’s not something to take on lightly though.

Co-signing a car loan is a big deal. You’re essentially guaranteeing that loan. If the primary borrower defaults, it will be down to you to keep up repayments. Potentially for years.

It’s a legally binding agreement and something you should think carefully about before committing.

How being a car loan cosigner impacts your credit

You don’t just need to consider the person you’re co-signing for before you sign. You also need to consider any future plans you may have. While it isn’t always possible to predict what’s going to happen, you do need to think about it.

Co-signing a loan requires a hard inquiry on your credit report. That means anyone else who makes a hard inquiry will also see it.

On its own, that’s no problem but if you wanted your own car loan in the near future, it may give a future lender pause.

That’s doubly true when you learn that the loan you’re co-signing also appears on your credit report. Even though it isn’t your loan, it could be in the future so it is recorded in the same was as if it was your loan.

The loan also counts for your credit mix and against your debt to income ratio too.

If you think there’s a chance you might want a car loan of your own in the next few years, you need to think carefully about whether to co-sign or not.

Keep an eye on your credit

One aspect of being a co-signer that isn’t always made clear is what happens if the primary borrower misses a payment. If they don’t alert you to the fact, it’s usually only after the fact that you know anything about it.

That could be when the lender sends you a default letter and after they have marked the payment as late on your credit report.

Some lenders will alert you sooner so you can make a payment before that but don’t depend on it. You need to work with the primary borrower and let them know they need to tell you if they get into trouble.

That’s a discussion that needs to happen before you sign so you can be confident in the fact they would let you know before they missed a payment. That way, nobody’s credit gets dinged!

Contact Unique Chrysler for help, advice and competitive Smithville car finance and leasing.

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