Bad, thin, or no credit can make it harder to get approved for auto financing. Even when working with subprime lenders who are willing to approve people with less-than-perfect credit, sometimes consumers still can't get the green light. In these scenarios, it's likely that a cosigner can increase a borrower's chances of being approved. But there are pros and cons of having a cosigner on a bad credit auto loan.
What is a Cosigner?
Enlisting a cosigner can increase your chances of getting approved for vehicle financing. A cosigner is a person with good or great credit who signs a loan alongside a primary borrower. By signing the loan alongside them, the cosigner agrees to take on the legal responsibilities that come with a loan.
This means that the loan will show up on the cosigner's credit reports and that they will be responsible for paying it back in the event the primary borrower misses payments or defaults on the loan.
Because of the delicate nature of this relationship, it's important that the primary borrower and the cosigner know and trust each other. Both need to understand their responsibilities before agreeing to enter the relationship. Most people only ask a parent, family member, spouse, or the closest of friends when in need of a cosigner.
The bottom line is that the addition of the cosigner adds extra assurance from the lender's point of view. It makes them more willing to approve a loan because it makes it more likely that all of the loan terms will be met.
But you'll still want to weigh the pros and cons before agreeing to become a cosigner or asking someone to cosign for you.
The Pros of Using a Cosigner
There are many positives to using a cosigner to help you get a car loan. From help with loan approval to making a payment in a pinch, there can be many benefits to a cosigned auto loan.
It can mean the difference between approval and denial.
A cosigner can help an applicant with damaged credit get approved for a loan they would otherwise be denied. If the primary borrower doesn't quite meet the requirements and they really need a car, a cosigner can really be a lifesaver.
It can help the primary borrower build credit and learn valuable lessons.
An auto loan is a great credit builder, provided that all of the payments are made on time. Say a cosigner helps a primary borrower get approved and the loan is completed successfully. Ideally, this means they won't need a cosigner on their next loan because their credit should have improved. Plus, a cosigner needs to have good credit, which indicates a strong financial history. They can teach the primary borrower the ways of proper credit management and help them learn valuable financial lessons.
It can help the primary borrower save money.
Sometimes, a cosigner can help somebody with poor credit qualify for more favorable terms. If the primary borrower can receive a better interest rate with a cosigner compared to what they could qualify for (if at all) on their own, they can save money over the course of the loan.
The Cons of Using or Being a Cosigner
While there are benefits, there are drawbacks that must be considered as well. Cosigners carry a lot of responsibility when it comes to your loan, and not recognizing that can be detrimental. Here are some negatives to a cosigned car loan.
The cosigner is on the hook financially and credit-wise.
Cosigning is a serious matter that should not be taken lightly. A cosigner has to sign on the dotted line and take legal responsibility for the account. The loan will show up on their credit reports. That means a late payment, delinquency, or repossession will impact both people's credit scores. Plus, they can be held responsible for making payments if the primary borrower fails to. In a worst-case scenario where the primary borrower defaults on the loan, a cosigner can be the target of collection agencies or lawsuits because they are equally responsible for the loan obligations.
The cosigner's buying power is also affected.
Because the loan appears as an obligation on their credit report, it will be factored into future credit decisions should the cosigner need a loan, mortgage, or a line of credit. Lenders will include the loan payment when calculating the person's debt-to-income (DTI) ratio, even if they are not the primary borrower. This could make it difficult for a cosigner to get approved for additional credit until the loan is complete.
It's tough to remove a cosigner from a loan.
Once the loan is opened, it's usually very tough to remove a cosigner. The primary borrower would need to refinance the loan in order to terminate the cosigning agreement. This can often be difficult unless their credit score has significantly improved since the time the loan was opened.
Alternative Option: Subprime Auto Loans
Since many lenders have a credit-score cutoff, if you don’t meet the qualifications on your own, then a cosigner could be your answer. But, you may feel stuck when you apply for a car loan and you’re told the only way to get approved is by having a co-signer. However, it may not be your only shot at getting the vehicle you need with bad credit, there are alternate options available such as special financing and BHPH dealers.
Another word for bad credit is subprime. For borrowers with credit scores around 660 and below, and for those with no credit history or credit issues in general, subprime auto financing could be an answer if you're having trouble finding a cosigner. Because subprime lenders specialize in assisting borrowers with poor credit, a cosigner may not be required for subprime loan approval.
Subprime lenders are partnered with special finance dealerships. Instead of sitting across from the lender, you meet with the special finance manager at the dealership. They send your information along to the lender along with your documents proving you’re ready for a car loan. If one of their lending partners accepts your application, the finance manager gets the lender’s payment call. This spells out the maximum car payment you qualify for based on your current financial situation.
From there, with approval and max monthly payment in hand, you shop for a vehicle on the dealer’s lot. Once you find one that fits your circumstances and fulfills the lender’s stipulations (such as mileage, loan amount, and age), you take delivery!
The Bottom Line
It's pretty clear when laying out the pros and cons that the primary borrower is in line to receive most of the benefits from a cosigning agreement, while the cosigner has to assume most of the risk. This is another reason why it is important to only use or become a cosigner with/for someone you trust.
What we recommend: Make every effort to get approved for an auto loan on your own. Seek out a first-time buyer program, save up a substantial down payment, or improve your credit score before applying. If a cosigner is the only option, then we recommend that you buy an affordable car, keep the loan term as short as possible, and never miss a payment so you can improve your credit score and not harm theirs.
Or, perhaps the only reason you aren't being approved is that you aren't working with the right dealership. At Auto Credit Express, we help people with bad credit get connected to a dealership in their area that stands to give them their best shot at being approved. Get the car you need and the chance to rebuild your credit by completing our online auto loan application today.