If you’re a first-time car buyer or your credit is less than perfect, some auto lenders may require you to have a cosigner. Cosigners must meet specific requirements such as having good credit and a stable income, but having one on your car loan can help your chances of getting approved.
Benefits of Having a Cosigner on a Car Loan
So, what does a cosigner do for a loan? A cosigner’s role is to add themselves to an auto loan application (and the loan, itself) so the primary borrower can get approved. Depending on the lender, a cosigner may be required for borrowers with little to no credit history to increase the chances of approval.
If you’ve been asked to be a cosigner, the good news is that you can benefit from cosigning, too. As long as the primary borrower continues to pay the loan each month on time, your credit score will improve. But, sometimes life doesn’t work out so smoothly, and you could face some of the downsides to cosigning.
Cons of Having a Cosigner on an Auto Loan
While a cosigner is designed to help a credit-challenged borrower get approved for a loan, not everyone is comfortable with the arrangement due to the risks involved. There are three main drawbacks to cosigning:
- Cosigner must pay if the primary borrower doesn’t – If the primary borrower misses payments or defaults on the loan, the lender will expect the cosigner to make payments and cover any losses. Because the cosigner is putting their credit on the line for the primary borrower, any problems will affect the cosigner’s credit score, as well.
- Applying for more lines of credit could be affected – Once a cosigner agrees to cosign a loan, the loan is listed on their credit reports as an obligation. What this means is that if the cosigner plans on opening a new line of credit, the lender will factor in the cosigned loan as additional debt. Even if the cosigner isn’t making payments on the loan at the moment, the lender will include the loan’s payment when determining their debt to income ratio. This could negatively affect their ability to qualify for other credit while the car loan is open.
- Removing a cosigner isn’t easy – The only way to remove a cosigner from a loan is to refinance. So, once the cosigner signs on the dotted line, they can’t back out. If the primary borrower’s credit hasn’t improved over the course of the loan (usually necessary in order to qualify to refinance the vehicle), the cosigner may be stuck with it until the vehicle is paid off.
As a cosigner, the best way to avoid any financial conflict is to keep in contact with the primary borrower. Make sure they’re on top of their monthly payments, and if they need help, make sure you both work out a solution before any payments are missed and the lender comes for you.
The Bottom Line
Having a cosigner on an auto loan can increase your chances of approval. A cosigner will also help you build up or improve your credit. It’s important you talk with your potential cosigner and discuss what their role will be before signing the papers.
If you have a cosigner ready and want to finance a car, but are worried your bad credit will get in the way, don’t stress. Let Auto Credit Express help you find a dealer in your area. Getting started is simple. Just fill out our online auto loan request form today.
