How Cosigning for Auto Loan May Affect Your Credit Score

Do you ever wonder if you should cosign for an auto loan or not? What impact will it have on your credit score? It appears that the cosigning for an auto loan may have good or bad impact on your credit score. Here are some important factors to consider.

  • If you cosign in an auto loan application to help a relative, you are making a commitment to the loan provider that you will pay if the loan grantee does not pay.
  • Your loan amount will increase. ┬áThis will raise your loan to credit ratio, an important factor in the calculation of credit score. Higher loan to credit ratio lowers credit scores. This will negatively affect your credit score.
  • If the loan grantee is delinquent in payment, it will negatively impact your credit score.
  • Related: How Cosigning for Credit Card May Affect Your Credit Score

  • If the loan grantee stops payment on the auto loan, you will be responsible to pay the loan. If the loan is not paid, your credit score will go down.
  • There is a situation when your credit score may go up because of cosigning. Suppose, you cosign for a very responsible person. If this person pays the auto loan as agreed, this will build trust on your credit worthiness. This will improve your credit report and credit score.

Deciding on what to do when a close relative asks you to cosign for auto loan is difficult. Here are some suggestions you can consider before cosigning:

  • If you are unsure if the auto loan will be paid on time or not, you are taking a risk. Ask yourself if you will be able to monitor the auto loan payment, and make payment in case your relative needs help or cannot pay. If the answer is yes, you may cosign.
  • If you are cosigning for a financially sound and very responsible person, your risk may be low. In this case, cosign and get approval from your relative so that you can inquire about the activities on the loan. Be sure to monitor the auto loan payment and take appropriate action so that the loan is paid on time as agreed.

Cosigning for an auto loan will bring additional responsibilities to you. You must make sure that the auto loan is paid as agreed. If you can trust your relative on the loan payment, you may cosign, otherwise, staying away from cosigning will be advisable.

Posted in Car