Home > Co-Signing a Car Loan: What It Means for You

Co-Signing a Car Loan: What It Means for You

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Are you considering co-signing a car loan? 

You may have a close friend or even a relative who’s planning on buying a car, however, they have bad credit. Apart from trying to improve their credit score as they go, their next best bet would be looking for someone to co-sign their car loan. The person they’ll be looking for will have to have a secure job with a stable income and of course, they must have an eligible credit score. 

Essentially that co-signer must be someone who’s really trusted considering they’ll be taking equal responsibility for the car loan. If you’re someone who’s considering co-signing a car loan, this guide will help you learn more about how it works, and whether it’s right for you. 

What to keep in mind when co-signing a car loan

If you plan on co-signing a car loan, you will need to be assured that the co-signer will be sharing just as much responsibility as you are. Responsibilities include understanding how serious a car loan can be, making repayments on time, and ensuring the loan is paid in full over its term. Clearly you would pick a co-signer that you trust completely, and that could be a partner, relative, or really close friend. No matter how close you are to the co-signer, you must remember all the risks, obligations, and consequences you may come across once your contract is signed. 

Studies show that many family relatives, usually grandparents, are constantly contacted by debt collectors because one of their grandchildren or relatives has not been able to pay back their car loan. In cases like these, once one of the co-signers isn’t able to make payments, the car loan payments will be the full responsibility of the other payer. Essentially, lenders will not intervene and ask who’s paying what, as long as payments are being made in full and on time. It’s vital to ensure you’re financially ready to pay off the remainder of the loan in the event that the other party opts out.

It can affect relationships

Keep in mind that co-signing a car loan could also affect the relationship between both payers. When payments have been missed and the responsibility falls on one of the parties, this can be a cause for concern. There have been many instances, in which relationships have been negatively impacted by the financial burden of co-signing a car loan.

Furthermore, taking out a car loan with a partner could be risky in case a divorce occurs and the battle of paying off a car loan gets taken to court. So, yes, there are many risks that come with co-signing a car loan. You should always consider these risks before committing to a co-sign. 

Co-Signing a Car Loan: What Does It Mean?

Let us help you further understand what co-signing a car loan really means and how it works. When you co-sign a car loan, you typically sign a contract stating you are aware you share responsibility for the car loan. 

If you’re co-signing a car loan, remember that you’re not just a character reference, but you’re legally obligated to pay the loan in full. However, as mentioned before, that’ll only occur if the primary borrower fails to make their repayments. 

How Co-Signing a Car Loan Could Affect Your Credit

Typically, there are two main ways co-signing a car loan could potentially affect your credit.

Credit score 

Firstly, the fact that you’re obligated for debt will affect your credit score. Regardless of the fact that the car loan is being co-signed by you, it’ll appear as the loan is completely your own when shown on your credit report. What this means is, for instance, if the primary borrower makes a late or insufficient payment, then that negative notation that’s given will appear on both reports, and therefore affecting both credit scores involved. 

There is one thing to remember, and that’s that you might not even notice your credit score has decreased. This is mainly because as a co-signer, you might not be receiving all the monthly statements or late payment notifications. Therefore you won’t be aware of your credit score has been affected. This is unless you check your credit score consistently. So, as you can tell so far, having a few missed payments on a co-signed car loan can drastically negatively affect your credit score and could harm your potential chances of taking out another loan. 

Applying for finance

Another impact that we’ve briefly mentioned is your chances of taking out a loan. When it comes to independently taking out a car loan for yourself, your chances of getting approved can be significantly affected because of a co-signed loan in the past. Even while co-signing a car loan without any missed payments, your credit rating could be affected purely from the fact that you just co-signed a loan. This can affect your debt-to-income ratio on your credit report and therefore affect your score. It’s recommended that you consider your credit needs and future plans before agreeing on co-signing a car loan.

What You Should Consider Before Co-signing a Car Loan

Keep records 

One of the most important things to remember before co-signing a car loan is keeping up-to-date accurate records of all transactions. Make sure you’re saving copies of all the loan documents. Additionally, it’s best to also ask the primary borrower to keep you up-to-date with copies of payment receipts and any correspondence with the lender. It’s better to be safe than sorry when it comes to co-signing a car loan, and that’s merely for the fact that your credit is on the line equally as much as the primary borrower. Having records of everything can help you keep track of all transactions and could be used as legal documented evidence in the event things go sour. 


Another thing to consider before co-signing a car loan is whether or not there are any concessions from the lender. What this means is, you may negotiate some benefits with the lender for co-signing a car loan. Your lender may make a deal with you where you’ll be held responsible for paying the loan’s principal, but the lender won’t charge you any late fees. Additionally, you can contact your lender and request that all late payments are notified to you or if the primary borrower stops making their monthly payments. This can prevent a stack of payments being your responsibility. 

When Can Co-Signing a Car Loan Be Good For You

If a close friend or relative doesn’t have a credit score at all and you’re in a good financial position where you’re able to support them, then co-signing a car loan could be beneficial for both parties. 

Apart from helping a loved one get their dream car, there are a few other benefits that you can get from co-signing a car loan. 

Lower interest rates

Did you know that you can get lower interest rates from co-signing a car loan? Co-signed car loans tend to have lower interest than regular car loans. Having two people responsible for repaying a loan in full will significantly reduce the risk of the borrower being unable to repay. Because of this reduced risk, lenders tend to offer cheaper interest rates. 

Improve your credit score

Another benefit associated with co-signing a car loan is the ability of building a credit report. If you’re co-signing a contract with a younger member of your family that has no credit history, helping them in paying off a loan properly could help them build a strong credit report that could benefit any future chances of taking out other loans. 

Your wellbeing is a priority 

There are many risks and benefits that you can gain from co-signing a car loan, however, there is one other thing to keep in mind. It’s vital to always put yourself first. What we mean by this is that you should remember that if you’re not fully confident in your finances and with the consequences of co-signing a car loan, there’s nothing wrong with simply saying no. You could be saving yourself from getting in debt, negatively affecting your credit score, harming your chances of taking out future loans and most importantly, saving a relationship with a loved one from any trust or miscommunication issues. 

Jacaranda car loans

If you’re interested in financing a new or used car, you can apply for Jacaranda’s car loans up to $35,000. Although we don’t offer car loan co-signing, we can offer you an affordable loan with a flexible repayment period. To apply, scroll up to the top of this page to begin your application. Once you’ve applied, our assessment team will endeavour to get back to you with an outcome in 60-minutes.* If approved, you could have your cash in just 60-seconds after you’ve signed your contract.** it’s that quick and convenient! 

For more general information on personal and car loans, visit the Moneysmart website.

*If you have an NPP-enabled bank account

**if you apply during business hours and we don’t require any additional documents from you

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