While shopping for an auto loan, you may have heard the terms co-borrower and cosigner at some point. If you’re considering adding one to your car loan because you have bad credit, you should know the differences between them.
Why Add a Co-Borrower or Cosigner to Your Auto Loan?
Adding either a co-borrower or a cosigner to your credit application may increase your chances of getting approved by a lender. Adding either may convince the lender that the auto loan will be completed successfully.
You may also qualify for a larger loan than if you applied by yourself, and possibly a better interest rate. In fact, if you have bad credit, lenders may even require you to get a cosigner or co-borrower before they consider approving you.
Both a co-borrower and cosigner sign the loan documents with you and are equally responsible for making the monthly payments on time in the even you can't. So, what are the differences?
What Does a Co-Borrower Do?
A co-borrower, sometimes called a joint applicant, is someone who signs the car loan documents with you and is typically a spouse or a partner. For a lender to approve an auto loan with a co-borrower, both borrowers don’t necessarily need to individually qualify for an approval.
If the co-borrower is your spouse, the lender adds both your and the co-borrower’s income together to meet the income requirements. However, your credit histories and job and residence stability are generally looked at individually in order to determine approval for the car loan.
When you add a co-borrower, you’re both responsible for making the auto loan payments on time and both parties share ownership of the vehicle. Both of your names appear on the car’s title as well.
A co-borrower represents more security to a lender because the incomes of both borrowers contribute to repaying the loan. With two people equally responsible for the car payments, it typically lowers the chances of the borrowers defaulting on the auto loan.
What Does a Cosigner Do?
Like a co-borrower, a cosigner lends you their good credit score to help you get approved for a car loan. If you have bad credit, a cosigner gives a lender some peace of mind. If you, the primary borrower, are unable to make the loan payments, the cosigner acts as a backup payer.
Oftentimes, a cosigner is a parent, family member, or close friend. When you ask someone to cosign for you, be sure they have enough available income to cover your payments in the event you can’t.
Cosigners may also be turned down by the lender if their debt to income (DTI) ratio is too high. Every lender is different, so be sure to ask what their requirements are for yourself and your potential cosigner.
The cosigner doesn’t have ownership rights to the vehicle like the primary borrower. If you stop making payments, a cosigner can’t take possession of your car. However, if the cosigner doesn’t pick up the slack, you both are likely to face defaulting on the auto loan.
This leaves you facing repossession of the vehicle and harming your bad credit score even more. A default and repossession also negatively affect the cosigner. However, on-time payments can raise both yours and the cosigner’s credit scores.
Bad Credit Auto Loans
If you have bad credit, a lender may ask you to find a cosigner or co-borrower before considering you for a car loan. Two borrowers are typically better than one - especially in a lender’s eyes. But what if you can’t find a cosigner or co-borrower? Luckily, there are subprime auto loans.
There are lenders in some dealerships that work with bad credit borrowers called subprime lenders. Subprime lenders look at more than just your credit score for approval – they reference your ability, stability, and willingness to see you qualify for a car loan.
At Auto Credit Express, we’ve teamed up with dealers that have special financing departments that work with subprime lenders. To see if there is a dealership in your local area with bad credit auto loan options, fill out our free car loan request form.