When you apply for an auto loan with a cosigner, their credit score does matter – and so do a few other things. Let’s go over what you need to know when you’re enlisting a cosigner on a car loan.
Checking Your Cosigner’s Credit Score
Auto lenders largely use your credit score to determine your creditworthiness. If your credit score isn’t the best, a lender may turn you down for financing even if you have enough income.
When it comes to asking a cosigner to sign a car loan with you, one of the biggest, most important things about them is that their credit score is good. If you’re adding a cosigner to your auto loan because you have a poor credit score, adding someone with a score similar to yours won’t increase your approval odds.
A cosigner with a good credit score is a better loan risk. New borrowers or bad credit borrowers often have cosigners to help them get approved for loans, because a cosigner with good credit lowers that risk.
A cosigner’s credit score, income, and debt to income (DTI) ratio all matter to a lender, and must be checked by the lender before the loan application is approved. The cosigner must have enough available income to pay for the loan in case the primary borrower can’t, meaning they must have enough room in their budget, aside from their other bills and loans, to cover the payment.
It’s important to note that the cosigner doesn’t help you make the payments every month – that’s your responsibility. So, you’re going to need enough income to make the car payments on your own, with the cosigner merely acting as a backup.
What Your Cosigner Should Know
If you’re considering bringing in a cosigner, you should let them know the risks that are involved with cosigning a loan.
First, they’re going to get a hard inquiry on their credit reports when they apply for the loan with you. Hard inquiries are temporary, and only result in a slight drop in a credit score. If you apply with a few auto lenders within two weeks, only one hard inquiry is reflected on your credit score. So, feel free to rate shop, and talk to a few car lenders that you and your cosigner might work with.
Another thing to talk to your potential cosigner about is the possible drop in their credit score if you have late or missed payments. Although the cosigner's name isn’t on the vehicle’s title, a bad payment history can impact both your credit score and theirs.
However, the opposite is true, too! If you manage the loan well and maintain a good payment history, both of your credit scores can improve. Assure the cosigner that you’re going to maintain the auto loan responsibly, so you both should see improved credit coming out of this loan.
One more thing: the only way to remove a cosigner is by refinancing. This means replacing the original car loan with a new one. You can usually refinance after about one year – if you’ve stayed current on the payments, the vehicle is worth as much as the loan balance, and your credit score is good or has improved enough for you to go it alone.
Some lenders have restrictions on refinancing, but refinancing is a great way to lower your monthly payment and even qualify for a better interest rate, along with removing a cosigner.
Getting Into a Car Loan With Help
While a cosigner can help improve your chances of approval, it isn’t a guarantee. Another way to increase your chances of getting approved is by working with a subprime lender.
Subprime lenders work with bad and no credit borrowers through a dealer’s special finance department. Using more than your credit score, such as your income, work and residence stability, and a down payment, these lenders are a great resource if you're a new borrower who wants to start building a credit history, or a borrower who wants to rebuild credit.
Finding a subprime lender means finding a dealership that has special financing, and we want to help with that! Here at Auto Credit Express, we connect borrowers to these dealers for free by using our auto loan request form. We have a nationwide network of dealerships, and we can look for one in your local area. Get started today!