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How much does a co-signer help when taking out an auto loan?

Smiling mother and serious son examining trunk of car in dealership
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Smiling mother and serious son examining trunk of car in dealership
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If your income is limited or your credit score needs improvement, obtaining a car loan with affordable monthly payments can be challenging. Having a co-signer on your loan, however, can make a significant difference.  

When you have a co-signer that person’s income and credit profile are considered, and the loan terms you are offered are likely to be much more favorable. In some cases, having a co-signer can even make the difference between getting approved for the loan or being rejected. 

How a co-signer helps when taking out an auto loan 

Using a co-signer to apply for a car loan can provide a big boost for your application and ultimately improve the loan terms you’re offered. This is particularly true for those who may be just beginning to build their credit profile and have a limited repayment record for lenders to review, as well as for applicants whose credit score is less than ideal. When you have a co-signer, that person’s income and credit history are also considered as part of the application.  

In short, a potential lender will look at your co-signer’s ability to repay the loan entirely on their own. If your co-signer has a good credit score of 670 or higher and a higher income than your own, you should be approved for better loan terms. This is because having a co-signer gives the lender added assurance that the loan will be repaid even if you cannot make payments. 

Co-signers and minimum income requirements 

Lenders typically have minimum income requirements for loan approval. As the primary applicant, it is solely your income that the lender will consider when determining whether you meet such requirements. Your co-signer’s income will not factor into this part of the application — your co-signer’s income is not added to yours in order to help you meet the minimum income threshold. 

However, a co-signer must be able to prove they have enough income on their own to make the monthly car loan payments, should you default for any reason. The primary point to understand as the potential car buyer is that if it is more income you need in order to qualify for a loan, a co-signer is not likely to be the solution. 

Co-signing vs. co-borrowing 

There’s a significant difference between having a co-signer on your loan and having a co-borrower, which is sometimes also referred to as a co-applicant. It’s important that you understand how these two approaches to purchasing a vehicle vary.   

When you have a co-signer that individual does not have any ownership of the vehicle. They are simply agreeing to step in and make car payments should you be unable to do so.  

A co-borrower, on the other hand, is someone who shares ownership of the car. From the moment the loan is initiated, the co-borrower is just as responsible as you are for the payments. In addition, when taking out a loan with a co-borrower, any assets being used to guarantee the loan, such as a home or a car, may be owned by both co-borrowers. 

When not to have a co-signer on an auto loan 

Using a co-signer to get an auto loan approved is a step that should be considered carefully before applying. In some cases, it may not be a wise move for your needs and financial situation.  

The car isn’t in your budget 

If the car simply is not within your budget, even with a lower interest rate, it’s best to forgo the car purchase altogether. You may want to hold off on buying the car until you can save more money for a larger down payment, so the loan amount is more in line with your income and monthly budget. The other option is to look for a used car at a lower price point if you need a vehicle sooner rather than later. 

You might also want to look at whether your credit score can be improved, which should help you get a better interest rate and more affordable loan payments on your own.  

Your relationship might be strained 

Having a co-signer on an auto loan can be a slippery slope if any problems in your relationship arise. It may also add strain to the relationship if you fall behind on the loan payments and your co-signer is called upon to bail you out financially. 

The bottom line  

Having a co-signer to help you with an auto loan application can make the approval process easier. In many cases you will end up with more favorable loan terms, which can make the car more affordable for you each month. This can be particularly helpful if you’re someone who is just beginning to build a credit profile or if your credit score needs improvement. 

Before using a co-signer to proceed with a loan application, however, consider your options, including saving a larger down payment to make the car purchase more affordable for your budget or improving your credit score so that you’re able to earn a more competitive interest rate. 

 

Written by
Mia Taylor
Former Contributing Writer
Mia Taylor is a former contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
Edited by
Auto loans editor
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