Sometimes, a lender determines that your income and/or credit situation just isn't enough to approve your auto loan application. But they may be willing to approve you if you get a cosigner. However, there are risks associated with using a cosigner, and it may be best to avoid the arrangement.
The Benefits of Using a Cosigner
A cosigner is exactly what the name implies — somebody that is willing to sign the loan agreement alongside the primary borrower. The primary borrower uses the credit history (and/or income if using a spouse) of the cosigner. This helps push their application over the top and allows them to get approved.
If you have bad credit, or no credit history to speak of, a cosigner can be your saving grace. All you need is a close friend, spouse, or other family member with good credit.
This can be extremely beneficial for the primary borrower because:
- It allows them to get approved when they otherwise could not.
- It gives them a chance to build credit through positive loan payments.
However, from the cosigner's perspective, there are no benefits attached to the arrangement — outside of personal reasons such as wanting to help out the primary borrower. In fact, there are many risks involved in being a cosigner on an auto loan. They might be enough to show you that it may be best to avoid using a cosigner.
Reasons to Not Use a Cosigner
You should be aware of all of the risks involved if you are planning on using or being a cosigner on a car loan.
- The Cosigner Puts Their Credit on the Line
Both the primary borrower and the cosigner are equally responsible for the loan. It shows up on both of their credit reports. Therefore, if late payments are made, this will negatively affect the cosigner's credit.
- The Cosigner is on the Hook Financially
Additionally, the cosigner's money is on the line alongside their credit. The cosigner is legally obligated to make loan payments in the event the primary borrower cannot. This could mean making payments, being sued for the loan balance, and even wage garnishment.
- It Hurts Their Chances of Getting Credit
Despite the fact that they are likely not the one paying, the loan is going to affect the cosigner's ability to get approved for credit. The ability to get credit partially depends on your current credit obligations. If a cosigner applies for credit in the future, the lender will see the car loan and include it as part of their obligations. This could lead to the cosigner being denied credit they would otherwise be approved for.
- There's No Easy Way Out
The cosigner is responsible for the loan for as long as there's a balance. A cosigner cannot be dropped from a loan agreement, so don't think you can get out after a few months time. The only way to remove a cosigner is if the primary borrower is able to qualify for a refinance on their own.
- Relationships Can Be Tested
If things go south, it could hurt the relationship between the cosigner and primary borrower. When money is involved, you can never underestimate how ugly things can get.
The Bottom Line
For these reasons, we recommend that buyers explore every available option before resorting to using a cosigner. Try saving up a large down payment (at least 20%), or choosing an affordable vehicle you can drive while rebuilding (or building) your credit. Those with no credit can try to qualify for a first-time buyer program.
Or, it may simply be that you are not working with the right car dealership. At Auto Credit Express, we help people get connected to local dealerships that are qualified to handle unique credit situations.
Our service is free and it doesn't put you under any obligation. So, what are you waiting for? Get started by filling out our simple and secure car loan request form today.