A cosigner is a third party to a loan who provides assurance that the loan is repaid. Typically, a cosigner is someone in a good credit situation who provides support to reduce the “risk” of the loan in the eyes of a lender. If you have bad credit, one of the best ways to improve your chances of getting approved for a car loan is to have a cosigner. Not everyone is able to cosign on an auto loan, so it’s important you make sure any potential cosigner meets the basic auto loan requirements.
The Role of a Cosigner
The cosigner’s main role is to help the primary borrower get approved for a car loan. When the primary borrower has bad credit, the lender may ask for additional things such as a cosigner or larger down payment to help compensate for the credit risk. But there are financial responsibilities associated with cosigning, too. When a cosigner signs the loan document, they agree to take over payments in the event the primary borrower can’t make them. It’s extremely important that the cosigner is willing and able to pay and is aware of this before signing.
You may have heard of the term “co-borrower,” but don’t confuse it with “cosigner.” These two aren’t exactly the same thing. A co-borrower is also equally responsible for the loan, but they share ownership of the vehicle and their name is on the title. On the other hand, a cosigner isn’t on the title, and doesn’t own the car, but they’re still responsible for paying the loan if the primary borrower is unable to for any reason.
If you’ve been asked to be a cosigner on an auto loan, make sure you know what rights you do and don’t have, and discuss the process with the primary borrower. Being a cosigner is more than signing the loan contract and agreeing to pay in case the primary borrower can’t – it affects your credit score and history. Once you sign, your credit score is likely to drop a bit initially, and the loan is listed on your credit reports. This can, however, provide a benefit to your credit over time if the loan is always paid on time.
If your credit score is less than perfect, having a cosigner can improve your chances of getting approved for an auto loan, which you might not be able to do on your own. The loan, in turn, also gives you a chance to improve your credit over time, which can help you qualify for better car loan terms in the future. But before you start searching for a lender, you need to make sure any potential cosigner you have in mind meets the requirements.
There are three things a lender usually looks for in a cosigner:
- Good credit score (required) – Lenders require a cosigner to have good to excellent credit. Ideally, your cosigner’s credit score is around 700 or more. Lenders look for a cosigner with this kind of credit background to help ensure that your loan is paid on time every month. In this case, the cosigner puts their credit on the line for you each and every month until the loan is successfully completed.
- Ability to pay (required) – In addition, lenders want to make sure the cosigner, just like the borrower, is able to afford the loan. The specifics vary, but lenders look at the cosigner’s debt to income and payment to income ratios with the new loan added in to make sure they can afford the payment. The lender may ask for recent tax returns or a recent computer-generated pay stub from your place of employment.
- Stability (dependent) – One last thing that might be required is proof of stability. Depending on the lender, they may require your cosigner to provide proof of either residency, employment, or both. Many lenders like to see that a cosigner is well established in their community and favor cosigners who've lived at the same address for five years or more. As for employment, they like to see cosigners with the same employer for a few years, too. But lenders typically won’t ask for this as long as your cosigner has good credit.
Credit Impacts of Cosigning
So, now that you know what a cosigner’s role and requirements are, what exactly happens to you and your cosigner’s credit? As the primary borrower, you’re essentially “borrowing” your cosigner’s good credit in order to get approved for a car loan. You can see your credit improve over time by paying on time each month. If you’re unable to pay, the cosigner then becomes responsible for making the payments. But you should avoid falling behind or defaulting on the loan, because what you do not only affects your credit, but your cosigner’s as well.
If you’re the cosigner, the car loan shows up on your credit reports. So, it affects your credit slightly, but not enough to make a large impact – unless payments are missed. In the end, it’s a team effort. What one person does affects the other. It’s important that both the primary borrower and the cosigner understand the potential risks and weigh all options before taking out an auto loan.
Pros and Cons of Using a Cosigner
There are advantages and disadvantages to having a cosigner on an auto loan:
- Better chances of approval – A cosigner is sometimes required by lenders for approval if you have bad credit. But even if one isn’t required, you have a better chance of getting approved for a car loan by having one.
- Chance to improve credit – Taking out an auto loan and making the payments on time can help improve your credit score over time. Once your credit has improved, you likely won't need a cosigner the next time you need to finance a vehicle.
- Better interest rates – Because interest rates are based on a borrower’s credit and risk, having a cosigner may put you in a better position to qualify for a better interest rate.
- You risk hurting your cosigner’s credit – If you miss payments and/or default on the loan, their credit is negatively impacted just as your's is.
- Cosigner accountability – Once you miss a payment(s), the responsibility falls to your cosigner to make it. If your cosigner isn’t willing to pay, it can cause even more problems, such as repossession.
- Can affect your personal relationship with the cosigner – If you don’t keep your cosigner up to date on the car loan or blindside them with a default, it can affect your personal relationship. Discuss any “what ifs” and have a plan in place with them if you feel you won’t be able to make the payment. Always be honest and open about what’s going on with you and your auto loan.
Find Financing Today
Whether you’re a first-time car buyer or are struggling with credit, having a cosigner for an auto loan can improve your chances of getting approved. Because of the responsibilities involved, you should discuss the role of a cosigner with anyone who’s agreed to do this for you before you visit the dealership.
If you have a cosigner and are ready to buy a vehicle, let The Car Connection lead the way. With our simple auto loan request form, and our nationwide network of dealers, we want to connect you to a local dealer that can help you get the financing you need.