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If your income is limited or your credit score is poor, getting a car loan with affordable monthly payments can be hard. But having a co-signer for a car loan can make a significant difference.
When you have a co-signer, that person’s income and credit profile are considered in addition to yours. The loan terms lenders offer are likely to be much more favorable. Sometimes, 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
- Improve your chance of approval. A co-signer adds to your application if you don’t have an extensive credit history or have a poor credit score. Lenders will see that someone else is guaranteeing your loan and will be more likely to approve you to borrow.
- Improve your chance of good terms. A co-signer with good credit — a score above 670 — and a high income may also result in lower rates. According to data from Experian, subprime borrowers in 2022 had an average rate of 9.75 percent, while prime borrowers averaged 4.03 percent. Lower interest can mean thousands of dollars saved over the life of your loan.
- Improve your credit score. A car loan backed by a co-signer will help grow your credit history. Your credit score will also naturally increase as you make on-time payments. If you have other loans or credit cards, an additional loan could even reduce your credit utilization ratio, further helping improve your score.
Co-signers and minimum income requirements
Lenders typically have minimum income requirements for loan approval. As the primary applicant, the lender will only consider your income when determining whether you meet the 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 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 a potential car buyer is that a co-signer can’t help if you need more income to qualify for a loan.
Do you need a cosigner?
A co-signer can benefit you, although it may not be ideal for the co-signer. You should consider seeking one if:
- You have a low credit score or limited credit history
- Your debt-to-income (DTI) ratio is high
- You only qualify for high interest rates
- You have been rejected by lenders for a new loan
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, 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.
You might also want to look into improving your credit score, which should help you get a better interest rate and more affordable loan payments on your own.
If you can’t wait to get a vehicle, look for a used car at a lower price point. Used cars are typically less expensive. You can get similar features as new cars without breaking the bank, even if you still need a co-signer to qualify. You should always determine how much you can afford to spend before applying for loans or shopping for cars.
You expect conflict with your co-signer
A co-signer takes on significant risk when they agree to back your loan. If you get behind on payments or default, your co-signer will also see a negative impact on their credit score — and potentially on their other finances, if the lender pursues legal action. Of course, this may strain your relationship, potentially beyond repair.
Conflict could also arise if your relationship with your co-signer sours for reasons unrelated to the loan.
If things get tight, look into how to remove a co-signer from your loan.
The bottom line
Having a co-signer to help you with an auto loan application can make the approval process easier. You will often land more favorable loan terms and more affordable monthly payments. A co-signer can be particularly helpful if you’re 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, consider your other options. Saving a larger down payment can make the car purchase more affordable for your budget. So can improving your credit score to earn a more competitive interest rate.