Cosigners Explained For Car Buyers

What Is a Cosigner for a Car Loan?

A cosigner on a car loan is someone who signs the contract with you and acts as a backup in case you miss a payment. This means that if you miss your payment, the lender can go to the cosigner to collect. They also act as an additional credit source if the borrower has bad credit. A cosigner can essentially lend a borrower their good credit in order for them to gain approval.

When You Might Need a Cosigner

Situations when you might need a cosign include if you're a first-time car buyer and don't have a lot of established credit, or if you're recovering from a bankruptcy or repossession and have bad credit. A cosigner could provide the peace of mind that a lender is looking for and help you get across the finish line to approval.

How is a cosigner different from a co-borrower?

Cosigners aren't to be confused with co-borrowers. Co-borrowers are typically a spouse or partner, and they share full responsibility and ownership of the vehicle with the borrower. A cosigner doesn't have any right when it comes to the car and holds no ownership, unlike a co-borrower who does. Co-borrowers' names both go on the title, and they have joint ownership of the vehicle. A cosigner doesn't get their name on the title.

Who Qualifies As a Cosigner?

Nearly anyone with good credit can be a cosigner. Many borrowers ask family or close friends to be a cosigner, but you can also find a cosigner online via any number of services. Note, these should be used with caution and vetted carefully since you're trusting a stranger to sign a major financial commitment with you.

Cosigners need to meet the minimum credit and income requirements of the loan and must be at least 18 years old.

How Cosigning Works in a Car Loan?

A cosigner commits to certain terms and can help keep your loan out of default when they take on the responsibility of cosigning on your loan. They typically come with you to get the vehicle and sign the paperwork alongside you when it comes to the financial obligations. They act as a backup payer so the lender gets paid, and no one's credit is in danger.

For your cosigner to be of any help in your pursuit of a car loan, they must have a decent credit score, enough income to repay the loan if required, and enough room in their budget to do so.

Once you find a cosigner with a good credit score and enough available income, you can take them with you to apply for an auto loan. Both of your credit reports are pulled; you both need documents to prove you’re able to repay the loan (such as check stubs), proof of a working phone, proof of residency, and a driver’s license.

To get the deal done, all a cosigner needs to do is sign their name on the dotted line along with the primary borrower. But make no mistake, the role of the cosigner goes far beyond that of a simple character reference.

Factors To Consider When Choosing a Co-Signer

Cosigners must meet the same requirements as you when they help you apply for an auto loan. However, their credit must be better than yours.

There are many important factors to consider when choosing a cosigner, especially if you can't use a friend or family member. Close family and friends are the most common go-to for borrowers who need a cosigner.

Topping the list of what to consider when choosing a cosigner is credit score. A lender won't typically accept a cosigner who has a credit score of less than 670. Additionally, cosigners must be able to make loan payments on your behalf if you're unable. This means that a lender will check their debt-to-income (DTI) ratio before proceeding.

Lenders don't like to see a debt ratio that's too high. This means that if around 30% or more of your income is taken up by debt, lenders may not look on you as favorably to take on a loan, and this goes for your cosigner as well.

Legal and Financial Obligations

There are many legal and financial obligations when it comes to cosigning on a loan. So, if the cosigner doesn't pay the lender either, you'll both be in trouble when it comes to your credit. Additionally, the lender can pursue legal action against either the cosigner or the borrower, or both, so any cosigner is taking a big risk.

No Ownership Rights

Cosigners don't have any ownership of the vehicle, so they can't take it from you or drive it without your permission.

Benefits of Having a Cosigner

The benefits of having a cosigner include loan approval and, in some cases, better financing terms. This isn't always true, and the options you're eligible for, both with and without a cosigner, vary by lender.

For the Borrower

Benefits of cosigners for a borrower include:

• approval or easier approval
• longer loan terms
• lower interest rates
• less risk of default

For the Lender

For the lender, the benefits are just as great:

• safety net for missed payments
• extra peace of mind
• less risk of default

Risks and Drawbacks for Cosigners

When it comes to risk and drawbacks, there are a few things to be on the lookout for. As a cosigner, you are putting your credit and finances on the line and promising to make payments if the borrower does not. Lenders can come after you in court if the borrower doesn't pay, and they don't have to pursue the borrower first.

Credit and Financial Impact

If the borrower fails to pay, it will impact both your credit and theirs. And since you're the cosigner, and your credit is probably better, your credit score will likely drop more than the borrower.

Personal Considerations

When it comes to borrowers and cosigners, you have to weigh the pros and cons of cosigning carefully, since it's a lot of trust to put in someone. You need to ensure that your personal relationship won't be compromised by the threat of financial burden to the cosigner, or by strain and non-communication if a payment is missed. Always talk to your cosigner if something comes up and you can't pay; this way, they're not caught off guard, and your relationship isn't in jeopardy.

Should You Use a Cosigner for a Car Loan?

Whether or not you should use a cosigner is up to you and how much help you need to get approved. A cosigner helps in situations where a lender is on the fence due to credit issues, but a cosigner can't help in other types of non-approval situations, such as having too little income. For that roadblock to financing, you need to choose a co-borrower, which is different from a cosigner.

Situations Where It Makes Sense

Situations when you might need a cosigner include: when your credit is too low to qualify for a car loan, you have little to no credit history, or if you have a high DTI ratio. You may also be able to qualify for better rates and terms, such as a lower interest rate, if you choose to finance with a cosigner, even if it's not required.

Alternative Options

If you can't or won't use a cosigner to get a loan, and you're struggling with approval, there are several things you can do to help put yourself in a better position to buy. Some are quick fixes, such as using a larger down payment, while others are long-term goals, like improving credit scores.

One step you can take is to make a larger down payment. Having a substantial amount down when you're planning to buy a car can help get you approved, since then you're borrowing less money. If you can, a good rule of thumb is to aim for 20% or more of the vehicle's selling price as a down payment.

In conjunction with a bigger down payment, you can also opt for a less expensive car or a used vehicle. This automatically saves you money and typically makes approval easier. This is especially true if you look for that used car at a buy-here-pay-here dealership. BHPH dealers typically have fewer roadblocks to getting approval, and cosigners aren't generally necessary.

Finally, if you don't have any other alternatives, visiting a special finance dealership with subprime lenders can help. These lenders are equipped to work with people in low-credit situations, and may be just what you need to get the ball rolling on your next car loan.