Depending on your situation, a cosigner could make it easier for you to get a car loan. You don't need a cosigner if you have good credit, but a cosigner could be the key to getting approved if you have bad credit. Let’s take a look at how a cosigner can help, and what it takes to be one.
Cosigner Basics on a Car Loan
A cosigner signs the loan documents with a primary borrower. By adding a cosigner with good credit to the mix, this can help a primary borrower get approved. In fact, some lenders require buyers with bad credit to have a cosigner, depending on the situation.
To be a cosigner for somebody with less than perfect credit, the person you’re asking must have good credit (at least a 660 credit score), a minimum income of between $1,500 and $2,00 a month, and enough available income to comfortably make the loan payments. This is because they're legally obligated to pay on the loan if the primary borrower cannot.
Once your cosigner signs the loan contract, they can’t remove themselves from it. The only way to remove a cosigner is by the primary borrower refinancing the loan on their own, and you need to have good credit in order to qualify to do that.
Pros and Cons of Having a Cosigner
Now that you know what a cosigner is, what are the benefits and disadvantages to having one? Let’s take a look at the pros and cons of having a cosigner on an auto loan.
- Can be the difference between an approval and a denial – Cosigners can be the deciding factor for many lenders, depending on the primary borrower's situation. The special finance manager at a dealership that can handle bad credit lets you know what the lender requires, and can explain how a cosigner might help you.
- Could help the primary borrower save money – When you add a cosigner to a loan, it could save you money on the loan. Interest rates are generally higher than average for bad credit car buyers, but, in some cases, a cosigner could qualify you for a lower interest rate and reduce the interest charges on your loan.
- Helps the primary borrower build credit – Not only could you save money by adding a cosigner, you get the chance to build or your rebuild credit. Auto loans are a great way to improve your credit score, and if a cosigner can help you qualify, you’re going to get the chance to do so. All you have to do after getting approved is make all of your payments on time.
- Cosigners become responsible when primary borrowers can’t pay – If you miss a payment, the lender is going to go after your cosigner to make sure it gets made. Cosigners don’t own the vehicle, but are responsible for making payments in the event you can’t or don’t.
- Cosigner’s credit and buying power are affected – The car loan shows up on your cosigner’s credit reports, and missing just one payment is going to drop their credit score. In addition, if the cosigner wants to take out a loan of their own while being a cosigner, the additional loan debt could affect their approval odds. Lenders debt borrowers out, meaning they calculate their debt to income (DTI) ratio, which includes any current loans they cosigned. If their DTI ratio is too high due to the cosigned auto loan, it could impact their chances of qualifying for additional credit.
- Cosigners can’t remove themselves from the loan – Cosigners can’t walk away from the loan, nor can they remove their name from it. You, the primary borrower, have the power to remove them from the loan by refinancing. Unfortunately, your cosigner is stuck until that time, because you typically can’t refinance a car loan until at least a year has passed and your credit score has improved.
The Bottom Line
A cosigner can definitely make it easier to get an auto loan if you’re struggling with credit. Even if a lender doesn’t require you to have one, you should consider having one available, just in case. Make sure your cosigner knows what their role is and what they’re agreeing to in order to avoid confusion.
If you need help finding a dealer that can work with unique credit situations, Auto Credit Express is here for you. We’ve been helping consumers find the financing they need for over 20 years. We work with a nationwide network of dealerships, and we want to connect you to one in your area. To get started, fill out our free car loan request form today.