Co-Signing an Auto Loan: What You Need to Know

A family member or friend has asked you to co-sign their auto loan. It seems like a simple favor—just sign some paperwork to help them get approved. But co-signing is a serious financial commitment that can significantly impact your credit and finances.

This comprehensive guide explains what co-signing means, the risks involved, how to protect yourself, and alternatives to consider.

What Does Co-Signing Mean?

When you co-sign an auto loan, you're agreeing to be equally responsible for the debt. You're not just vouching for the borrower—you're legally obligated to repay the loan if they don't.

Key points:

• You're a co-borrower, not a reference
• The loan appears on your credit report
• You're 100% liable if the primary borrower defaults
• The lender can pursue you for payment without first pursuing the primary borrower
• You have no ownership rights to the vehicle

Think of it this way: You're taking out a loan for a car you won't drive, don't own, and can't control.

Why Someone Needs a Co-Signer

Lenders require co-signers when the primary borrower doesn't meet lending criteria on their own.

Common reasons:

• Low credit score: Below 650, lenders view them as high risk
• Limited credit history: First-time borrowers with no credit track record
• High debt-to-income ratio: Too much existing debt relative to income
• Recent bankruptcy or repossession: Major credit events in their history
• Insufficient income: Don't earn enough to qualify for the loan amount
• Self-employed with irregular income: Harder to verify stable income

Bottom line: The lender doesn't trust them to repay the loan on their own. That's why they need you.

The Risks of Co-Signing

1. You're Legally Responsible for the Debt

If the primary borrower misses payments or defaults, you must pay. The lender can pursue you immediately—they don't have to try collecting from the primary borrower first.

Example: Your nephew stops making payments after 6 months. The lender calls you demanding payment. You're legally obligated to pay, even if you can't afford it.

2. It Affects Your Credit

The loan appears on your credit report as if it's your own debt.

Impacts:

• Increases your debt-to-income ratio: Makes it harder to qualify for your own loans
• Affects your credit utilization: If it's a line of credit
• Late payments hurt your credit: If the primary borrower pays late, your score drops
• Default devastates your credit: Repossession or charge-off can drop your score 100-200 points

Even if they make every payment on time, the debt on your credit report can prevent you from qualifying for a mortgage, car loan, or other credit.

3. You Have No Control

You don't own the vehicle, can't drive it, and have no say in how it's maintained or used.

Problems:

• You can't prevent the primary borrower from missing payments
• You can't sell the vehicle to pay off the loan
• You can't take possession if they stop paying
• You have no legal rights to the car

You have all the responsibility with none of the control.

4. It Can Damage Relationships

Money and relationships don't mix well. Co-signing can strain or destroy relationships when:

• The primary borrower stops paying and you're stuck with the debt
• You have to make payments you can't afford
• The situation causes resentment and conflict
• Other family members take sides

Many co-signers report that the damage to the relationship wasn't worth it.

5. It Limits Your Own Borrowing

The co-signed loan counts against your debt-to-income ratio, which can:

• Prevent you from buying your own car
• Disqualify you from a mortgage
• Reduce the amount you can borrow
• Result in higher interest rates on your own loans

Example: You co-sign a $20,000 auto loan. When you apply for a mortgage, the lender counts that $20,000 debt against you, even though you're not making the payments. This could reduce your mortgage approval by $100,000+.

6. Difficult to Remove Yourself

Most auto loans don't allow co-signers to be removed. You're stuck until:

• The loan is paid off in full, or
• The primary borrower refinances on their own (requires their credit to improve significantly)

This could be 4-7 years of financial liability.

When Co-Signing Might Make Sense

Despite the risks, there are situations where co-signing might be appropriate:

1. Your Child is a First-Time Buyer

If your adult child has stable income but limited credit history, co-signing can help them establish credit.

Requirements:

• They have steady employment
• They can afford the payment on their own
• You trust them completely
• You can afford to take over payments if necessary

2. The Borrower Has Temporary Credit Issues

If someone has good credit history but a temporary setback (job loss, medical bills), co-signing might help them get back on track.

Example: Your sister had excellent credit but medical bills from an illness dropped her score. She now has stable employment and can afford payments, but needs a co-signer to qualify.

3. You Can Afford to Take Over Payments

If you have the financial resources to make payments without hardship, the risk is lower.

Important: Only co-sign if you can comfortably afford to take over the entire loan payment.

4. You're Willing to Accept the Risk

If you fully understand the risks and are prepared to pay the loan if necessary, co-signing might be acceptable.

Ask yourself: "Am I willing to pay this entire loan if necessary?" If the answer is no, don't co-sign.

How to Protect Yourself as a Co-Signer

If you decide to co-sign, take these precautions:

1. Understand the Full Terms

Before signing, know:

• Loan amount
• Interest rate
• Monthly payment
• Loan term
• Total amount to be repaid
• Late payment fees
• Repossession terms

Read the entire contract. Ask questions about anything you don't understand.

2. Get Access to the Loan Account

Request online access to monitor payments in real-time.

Why: You'll know immediately if a payment is missed, allowing you to address it before it damages your credit.

How: Ask the lender to add you to the online account with full access.

3. Set Up Payment Alerts

Most lenders offer text or email alerts for:

• Upcoming due dates
• Missed payments
• Late payments
• Account changes

Enable all alerts so you're never surprised.

4. Create a Written Agreement

Draft a written agreement with the primary borrower that includes:

• Their commitment to make all payments on time
• Agreement to notify you immediately if they can't make a payment
• Your right to make payments and seek reimbursement
• What happens if they default

Have both parties sign and date it. While not always legally enforceable, it sets clear expectations.

5. Require a Larger Down Payment

The more they put down, the less you're liable for and the less likely they are to default.

Recommendation: Require at least 20% down payment.

6. Choose a Shorter Loan Term

A 36-48 month loan gets you out of liability faster than a 72-84 month loan.

Trade-off: Higher monthly payment, but less total risk.

7. Consider Life Insurance

If the primary borrower were to pass away, you'd be responsible for the remaining balance.

Option: Require them to carry life insurance naming you as beneficiary for the loan amount.

8. Monitor Your Credit Report

Check your credit report quarterly to ensure payments are being made on time.

Free options: Credit Karma, Borrowell, or annual reports from Equifax and TransUnion.

9. Have an Exit Strategy

Discuss upfront:

• When will they refinance on their own?
• What credit score do they need to refinance?
• What's the timeline for removing you as co-signer?

Set a goal: "After 18 months of on-time payments, you'll refinance to remove me as co-signer."

Alternatives to Co-Signing

Before agreeing to co-sign, consider these alternatives:

1. Help Them Improve Their Credit First

Instead of co-signing now, help them spend 6-12 months improving their credit so they can qualify on their own.

How to help:

• Pay down credit card balances
• Dispute errors on credit report
• Make all payments on time
• Become an authorized user on your credit card

Timeline: 6-12 months of effort can improve their score enough to qualify without a co-signer.

2. Lend Them Money for a Larger Down Payment

A larger down payment can help them qualify without a co-signer.

Example: Lend them $3,000 for a down payment instead of co-signing a $20,000 loan.

Benefit: Your risk is limited to $3,000 instead of $20,000+.

3. Help Them Find a Subprime Lender

Specialty lenders work with bad credit customers without requiring co-signers.

Trade-off: Higher interest rate, but no co-signer needed.

Example: Canada Auto Approval approves customers with bad credit, bankruptcy, and no credit history—no co-signer required.

4. Co-Sign for a Smaller Loan

Instead of co-signing for their dream car, co-sign for a less expensive, reliable vehicle.

Example: Co-sign for a $10,000 Honda Civic instead of a $25,000 SUV.

Benefit: Less risk, more affordable payments, easier for them to manage.

5. Offer to Rent Them a Vehicle

If you have an extra vehicle, rent it to them with a rent-to-own agreement.

Structure:

• They make monthly payments to you
• After a set period (12-24 months), ownership transfers
• You maintain control and can take the vehicle back if they don't pay

Benefit: You have more control and legal rights than as a co-signer.

6. Help Them Find Alternative Transportation

Sometimes the best help is showing them they don't need a car right now.

Options:

• Public transportation
• Carpooling
• Bike or scooter
• Ride-sharing services

Timeline: Use alternative transportation for 6-12 months while saving for a down payment and improving credit.

What to Do If the Primary Borrower Stops Paying

If the worst happens and they stop making payments:

1. Act Immediately

Don't wait—every day of non-payment damages your credit more.

Contact:

• The primary borrower (find out what's happening)
• The lender (explain the situation and ask about options)

2. Make the Payment Yourself

If they can't pay, you must to protect your credit.

Important: Making the payment doesn't mean you're taking over permanently. It buys time to find a solution.

3. Explore Options with the Lender

Lenders may offer:

• Payment deferral: Skip 1-2 payments (added to end of loan)
• Loan modification: Extend the term to lower payments
• Refinance: If possible, refinance to more affordable terms

4. Sell the Vehicle

If the primary borrower agrees, sell the vehicle to pay off the loan.

Process:

1. Get the vehicle's current value
2. Compare to loan payoff amount
3. If value > payoff, sell and pay off loan
4. If value < payoff (upside down), you'll need to cover the difference

5. Voluntary Surrender

If there's no other option, voluntarily surrender the vehicle to the lender.

Consequences:

• Loan is not forgiven—you owe the deficiency (loan balance minus vehicle sale price)
• Severely damages credit (similar to repossession)
• Lender can sue for deficiency balance

This should be a last resort.

6. Legal Action

If the primary borrower has the means to pay but refuses, you may need to take legal action to recover your payments.

Consult an attorney about:

• Small claims court (for smaller amounts)
• Civil lawsuit (for larger amounts)
• Wage garnishment

Reality: Legal action is expensive and time-consuming, and you may never recover the money.

Questions to Ask Before Co-Signing

Before agreeing to co-sign, ask yourself:

1. Can I afford to take over the entire loan payment?

   • If no, don't co-sign

2. Do I trust this person completely?

   • If you have any doubts, don't co-sign

3. Can I afford to lose this money and the relationship?

   • If no, don't co-sign

4. Am I planning to apply for credit soon (mortgage, car loan)?

   • If yes, don't co-sign—it will hurt your application

5. Have they demonstrated financial responsibility?

   • If no, don't co-sign

6. Are there alternatives to co-signing?

   • If yes, explore those first

7. Am I being pressured or guilted into this?

   • If yes, don't co-sign

If you answered "no" or "I'm not sure" to any of these questions, don't co-sign.

What Lenders Won't Tell You

1. They Prefer Co-Signers

Lenders love co-signers because it doubles their chances of getting paid. They'll encourage co-signing even when the primary borrower might qualify with a higher rate.

2. They Can Pursue You First

Despite what you might think, lenders can pursue you for payment before trying to collect from the primary borrower. You're equally liable.

3. It's Nearly Impossible to Remove Yourself

Lenders have no incentive to remove co-signers. You're stuck until the loan is paid off or refinanced.

4. Your Credit Suffers Even with On-Time Payments

Even if every payment is made on time, having this debt on your credit report increases your debt-to-income ratio and can prevent you from qualifying for your own loans.

The Bottom Line

Co-signing an auto loan is a serious financial commitment that should not be taken lightly. While it can help someone you care about, it comes with significant risks to your credit, finances, and relationships.

Before co-signing:

1. Fully understand the risks
2. Ensure you can afford to take over payments
3. Explore alternatives
4. Protect yourself with monitoring and agreements
5. Be prepared to say no

Remember: Banks and lenders require co-signers because they don't trust the primary borrower to repay the loan. You're taking on risk that professional lenders won't accept.

A Better Alternative

At Canada Auto Approval, we specialize in approving customers without requiring co-signers. We work with:

• Bad credit (scores as low as 400-500)
• No credit history
• Bankruptcy and consumer proposals
• First-time buyers

Benefits of working with us instead of co-signing:

• No co-signer needed
• The borrower builds credit on their own
• No risk to family relationships
• Competitive rates for bad credit situations

If someone is asking you to co-sign, suggest they apply with us first. We may be able to approve them without putting you at risk.

Get pre-approved in just 3 minutes with no impact to credit score. Let's find a solution that doesn't require co-signing.