1. Missed Payments: When the primary borrower fails to make payments on the car loan, the co-signer becomes responsible for the debt. If the co-signer also misses payments, it will be reported to the credit bureaus and negatively affect their credit score.
2. Repossession: If the car is repossessed, it will appear as a negative item on the co-signer's credit report. Repossession can significantly lower a credit score and can stay on the credit report for up to seven years.
3. Reduced Credit Score: Missed payments and repossessions can lead to a decrease in the co-signer's credit score. A lower credit score can make it more difficult for the co-signer to obtain credit in the future or may result in higher interest rates.
4. Loss of Collateral: If the car is repossessed, the co-signer may lose their interest in the vehicle. It can be stressful and result in financial loss for the co-signer.
5. Difficulty Obtaining Credit: A lower credit score due to a co-signing car repossession can make it more challenging for the co-signer to obtain credit in the future. Lenders may view the co-signer as a higher risk based on their credit history.
6. Long-Lasting Impact: Negative items such as missed payments and repossessions can remain on the credit report for several years. It takes time and effort to rebuild a credit score after such negative marks are removed.
To protect their credit, a co-signer should carefully consider the risks and ensure the primary borrower has a good repayment history before agreeing to co-sign a loan. If the primary borrower defaults on the loan, the co-signer should promptly take action, such as contacting the lender to make arrangements for repayment, to minimize the potential damage to their credit score.
