A cosigner can help a primary borrower get approved for a car loan, but this comes with responsibilities that need to be considered. Both borrowers should be aware of what a cosigner is, their responsibilities, and the requirements they need to meet.
What is a Cosigner?
A cosigner is someone – usually a family member or close friend – who signs a loan along with the primary borrower. A cosigner typically has good to great credit and a lengthy credit history, which greatly improves a borrower’s chances of getting approved. This makes cosigners great for borrowers with little to no established credit, and for those with bad credit who'd be denied on their own.
However, you need to understand that a cosigner is much more than a character reference. Cosigners are required to sign the loan, which makes them legally responsible for it. This means they're guaranteeing the loan is repaid. Not to be confused with a co-buyer who has rights to the car, a cosigner has no ownership rights to the vehicle even while sharing responsibility for paying the loan.
While there are many risks associated with cosigning an auto loan, it's a great way to help a close friend or family member. A cosigner helps them get approved so they can finance a car and also have a chance to improve their credit through on-time loan payments. While these personal reasons can make it worthwhile, it's important that the cosigner understands the risks and responsibilities.
Cosigner Responsibility for a Car Loan
Asking somebody to be a cosigner comes with responsibilities. A cosigner has to:
- Sign on the dotted line – A cosigner becomes legally obligated to the loan because they have to sign all documents related to the sale and the loan. We recommend that cosigners receive copies of all of these documents to keep in their records.
- Pay when the primary borrower doesn’t – Part of being legally responsible for the loan means making payments if the primary borrower cannot. The cosigner agrees to share full responsibility for loan payments as if the loan was theirs and theirs alone. This also makes the cosigner responsible for any late fees if the lender is unable to collect from the primary borrower. In a worst case scenario that includes repossession, cosigners could face a lawsuit, judgement, and even wage garnishment – and the lender doesn't even have to attempt to collect from the primary borrower first.
- Put their credit on the line – The car loan also appears on the credit reports of the cosigner as if it was their own. This means their credit score can be impacted for better or worse, depending on how the loan is paid. For example, a late payment drops the credit score of both the primary borrower and cosigner. Additionally, a cosigner's ability to get other lines of credit is impacted. Because it shows on their credit reports, the loan is factored into their debt load, which can make it more difficult to get approved for other forms of credit while the loan is open.
- Be in it for the long haul – A cosigner cannot be removed from an auto loan unless the primary borrower qualifies to refinance on their own. This means the cosigner is tied to the loan for as long as it's open.
If both parties understand the risks and responsibilities and still want to move forward, they should be aware of the requirements for being a cosigner. A cosigner typically has to have:
- Good credit – If the primary borrower has bad credit and needs a cosigner in order to qualify, the cosigner has to have good credit. A lengthy credit history won't hurt, either.
- A qualifying income – Unless the cosigner is the primary borrower's spouse, incomes can't be combined. This means both the cosigner and primary borrower have to individually meet the lender's income and debt to income ratio requirements.
The Bottom Line
The responsibilities of a cosigner go far beyond that of offering their signature. With their credit and finances on the line, it's important that both the primary borrower and cosigner understand the arrangement before agreeing to enter it.
If you tried to get a car loan and were turned down, a cosigner may give you the boost needed to get approved. Or, it's possible that you weren't working with the right dealership. Auto Credit Express can match you with a local dealer that specializes in handling difficult credit situations, and our service doesn’t put you under any obligation. Start the process right now by submitting our free and secure auto loan request form online.