There are a few reasons why you might be asked to get a cosigner on a bad credit auto loan. It might be that you will need one in order to get approved.
To start, a bad credit auto loan is a car loan made available to consumers with less than perfect credit. People with low credit scores are usually turned down by traditional lending sources like banks and credit unions. However, they can get financed with one of these loans.
Still, if you are in this situation, you are going to need to meet the requirements of a subprime lender. Usually, that means having an income of at least $1,500-$1,800 a month before taxes and having the available income to handle a car payment.
However, there are instances when a lender will request a little more help from an applicant. Sometimes they will ask you to provide a cosigner, someone who will sign the loan agreement with you. This means this person will be equally responsible for the loan.
There are a number of reasons why you may be asked to provide a cosigner.
To Boost Your Credit
If you are dealing with bad credit, you get a cosigner with good or great credit to give your application a boost. This may also work for some applicants with no credit history at all. You essentially "use" the co-applicant's good credit score in order to help your chances of getting approved.
This works because a cosigner gives the lender an extra assurance that the loan will be paid as agreed. That's because a cosigner is legally responsible for paying the loan if you, the primary borrower, don't. In other words, the co-signer serves as an additional guarantee to the lender that the loan will be repaid.
To Boost Your Income
Subprime lenders also take a close look at your income situation. On top of verifying your income, they will also calculate your DTI and PTI ratios.
Your debt-to-income (DTI) ratio is your monthly debt obligations divided by your monthly pre-tax income. It helps lenders see how much of your income is already promised to other bills. Most won't accept an applicant with a DTI ratio over 50%.
Your payment-to-income (PTI) ratio is an estimated monthly car and insurance payment divided by your monthly pre-tax income. This helps lenders get an idea of how large of a car payment your finances can handle. Subprime lenders don't like your PTI ratio to top 15-20% of your income.
If you don't meet the minimum income requirement, or DTI or PTI threshold, a cosigner can help. But ONLY if you are married to them. If you get your spouse to cosign a car loan with you, their income can be added with your own. This means that the lender use both incomes to qualify you. You cannot add, or "co-mingle", funds with any cosigner other than a spouse.
To Provide a Source of Garnishable Income
In addition to the other income requirements, a lender will also want your income to be garnishable. This gives them added assurance that the loan will be repaid one way or another.
It is possible for somebody whose only income is from a fixed source to meet all of the lender's requirements. Examples of fixed income sources include disability, social security, court-ordered child support or alimony, a pension, etc. However, many of these fixed income sources cannot be garnished, which means they wouldn't qualify.
In this scenario, the only way for an applicant whose only source(s) of income cannot be garnished to be approved is with a cosigner. And the cosigner would have to have good credit and a garnishable income source.
The Bottom Line
A cosigner can help you get approved in some circumstances, which can give you a chance to improve your credit history with on-time auto loan payments. If you are having trouble getting approved for a bad credit car loan, Auto Credit Express can help.
We can match you with a dealership in your area that specializes in working with all credit types. Our service is free and puts you under no obligation, so you have nothing to lose. Fill out our simple and secure online application to get started today.