A cosigner can come in very handy if you have no or low credit score and trying to buy a new car with an auto loan. Including a cosigner in your auto loan application will significantly increase your chance of loan approval and lower your interest rate. However, including a cosigner also involves some risk for the cosigner. Therefore, it is very important to think clearly before asking someone to be a cosigner for your car loan. Today, I will discuss the importance of a cosigner and how much a cosigner can help on auto loans. Read through the article to know the details.
Applying for a car loan with a cosigner will significantly help you get the loan but it can be very risky for the cosigner. If someone asks you to be the cosigner then it’s something you should try to avoid because if the borrower defaults on the loan, then you will be responsible for the loan. But if you can include a cosigner on an auto loan then the cosigner can get you approved or get you a better interest rate.
What Is A Cosigner?
A cosigner is an individual who applies for a loan with the main borrower. Basically, a cosigner allows the loan providers to use their credit history and other financial details and make the decision about the loan application. A cosigner takes joint responsibility for your loan and he/she is listed with you on any financing agreement. While choosing a cosigner, make sure you pick someone who has a credit score of 670 or above. When you apply for a loan with a cosigner, the lender will use the cosigner’s income to calculate their debt-to-income ratio and it is a very important factor. There are few things that you should consider before choosing a cosigner. They are –
1. Creditworthiness of the Cosigner
2. Willingness to Cosign on Your Loan
3. Your Cosigner’s Ability to Pay
4. Stability in Employment and Residence
When Should You Get A Cosigner?
There are lots of benefits of including a cosigner to an auto loan application. If you have the income and savings to pay off the auto loan but your credit score is low then you can choose to add a cosigner to your loan application to get approved or secure a favorable interest rate. You should try to ask a family member or friend to become your cosigner. While asking a person to become your cosigner make sure you show the cosigner that you will be able to make your monthly payments. Moreover, even if you have sufficient money, finding a cosigner might still benefit you. Having a cosigner with a good credit score will minimize the interest rate as well as make the other terms more affordable.
Reasons You Need A Cosigner On An Auto Loan
There are many reasons you might need a cosigner. One key reason is, you have a low or bad credit score and you have been denied an auto loan. Moreover, if you are looking for a better interest rate then a cosigner will be a great help for you. Besides, if the lender thinks you are a high-risk borrower, then the lender will ask you to find a cosigner before approving you. Some common reasons the lender might ask you to add a cosigner are –
1. You have negative information on your credit report
2. Your history of employment is short or unstable
3. Your debt-to-income (DTI) ratio is high or deemed to be too high
So, from a lender’s point of view, a cosigner is a second person for repayment of the loan.
How Does Cosigning For An Auto Loan Work?
Basically, a cosigner is lending you his/her good credit score and taking partial responsibility for your auto loan contract. If you add a cosigner to your loan application then both you and the cosigner have to submit similar information to the lender. Moreover, the cosigner will be subject to a credit check, too. Usually, the documents required for an auto loan varies depends on the lenders but some common documents you would need are –
1. Driver’s license
2. Proof of income
3. Verification of address
4. Social Security number, etc.
Advantages And Disadvantages Of Cosigner For An Auto Loan
Advantages Of Cosigner For An Auto Loan
Including a cosigner for an auto loan will improve your chances of approval. If you have a low credit score or the lender thinks that you as a high-risk borrower on your own then a cosigner would lower the risk by vouching for you. Moreover, you can also get a better interest rate because a good credit score hugely influences the interest rate you receive on a car loan. If the lender offers you a high interest rate because of your low credit score then you can try to include a cosigner who has a high credit score. Besides, you can build your credit rapidly with the help of the cosigner. When your loan is approved it will include in your credit report and as long as you make your payments on time, it will help you build the credit score rapidly.
Disadvantages Of Cosigner For An Auto Loan
Along with the advantages, there are few disadvantages of a cosigner for an auto loan. Including a cosigner might make you wind up with a loan you can’t afford. Therefore, before accepting a loan offer, make sure you check the monthly payment amount and see if you can afford it. If the monthly payments are more than your budget then you might find it very difficult to make the payments in time. Moreover, if you miss the loan payments then it will badly hurt your credit score as well as the cosigner’s credit score. If you default on the car loan then it will do further harm to the credit score. Also, taking a loan with another person is a big commitment and if you can’t continue the loan then it can complicate the personal relationship with the person.
How To Raise Your Credit Score For Future Car Loans
If you have a good credit score then you won’t need a cosigner to get the approval of the auto loan. You can automatically approve your car loans. There are few easy ways you can increase your credit score for future car loans. They are –
1. You should pay down all the debts, such as credit cards or personal loans
2. You should take care of all the past-due accounts and charge-offs
3. Make sure, you pay the bills on time
4. Don’t open too many new credit cards and loans
Moreover, you can save money for the down payment of the car and it is also a great way to minimize the loan amount as well as the loan interest rate.
Finally, whether you should include a cosigner or not is a personal decision, and it’s totally up to you. However, before making the final decision, make sure you check your credit report and consult with a financial expert to find out how much you can get from the auto loan. After considering everything, if you don’t have any option left then you can consider adding a cosigner to your auto loan.
Last Updated on August 6, 2022 by Ana S. Sutterfield
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.