Key Takeaways
Getting approval for an auto loan might be difficult if one has a bad credit history or a poor credit score. If they get approved, the interest rate may be rather high, increasing both their monthly payment and the overall cost of the loan. However, if they apply for the loan with a co-signer, they may get approved and perhaps receive a lower interest rate. Even though it sounds good on paper for the borrower, there is a catch if you are the co-signer.
A co-signer's role is analogous to that of a loan applicant. Contemplate whether or not you are capable and have the financial stability to back up the borrower if they fail to make their monthly payments on time. If yes, only then should you move forward with any proposals.
Initially, you should seek financial institutions willing to approve your loan application, even with a co-signer. Then it's all about getting prequalified. You may use quotes from several lenders to evaluate their interest rates, conditions, and fees and select the most favorable one.
Finally, you will be asked to submit your application for the loan together with the necessary info. It includes your identification proof, proof of income, and other documents for both you and the borrower. Each of you will also need to consent to a credit check. If you are approved, the borrower must immediately begin making plans to ensure their monthly payments are made on time.
As a co-signer, you might increase the chances of getting the loan approved but take on a significant responsibility. Before agreeing to co-sign a loan, you consider its pros and cons.
| Pros | Cons |
|---|---|
| Boost borrowers' chances of getting a loan. | Co-signer's credit will take a hit if the borrower fails to pay on time. |
| Borrowers can get lower, more manageable rates. | The co-signer is prone to late fines, collection fees, or legal action. |
| Chance to build or restore borrower's credit. | Financial commitments can affect the personal relationship between the co-signer and the borrower. |
If your relationship is robust and can withstand the financial strain, then it's a yes. If you can manage the monthly payments, have the means to pay off the loan if required, and bear a long-term financial commitment, then serving as a co-signer is reasonable. A friend or family member may appreciate it if you help them when they need financial support.
A co-signer is not a character reference, despite common belief. The co-signer will be held liable under the law and financially for the debt, just as the borrower would be. Lenders might hold both of you accountable for untimely payments and late fees even if they intend to pay off the auto loan independently. The co-signer is just as responsible for the automobile, but they cannot use it without the principal borrower's consent.
If the borrower you co-signed for defaults on the loan, you will be held financially accountable for the loan amount and interest accrued until the borrower gets a new auto loan. Unlike other loans, auto loans can stretch for up to 84 months.
By agreeing to be a co-signer, you will enter into a legally binding partnership with the borrower. If you're unsure you can follow through on your bargain, don't sign up for a co-signed loan. They may be able to refinance their auto loan later if they improve their credit scores. By getting a new loan solely under their name, they may be able to remove as a co-signer.
Can you afford to take over the monthly payments if the individual you co-signed defaults on their loan? You may be expected to repay a sizable sum, depending on the size of the loan and the length of the loan period. If you can't afford to pay your share of the bill, agreeing to co-sign might end your financial stability.
You should check in with your friend or family member every month to make sure they plan to make their loan payment on time since late or missing payments can harm your credit score.
This may prompt some awkward exchanges. If your buddy fails to make a payment, the lender is not obligated to inform you. However, you may ask the lender to keep you updated.
The connection between you and your friend or family member may suffer if you have to keep tabs on them to ensure they're paying or if you have to cover a missing payment. Think about whether or not you think your relationship can survive the increased financial strain.
Think carefully about whether or not your relationship can bear a shared financial strain before deciding to be a co-signer on a friend's or family member's loan. In addition to the stress that discussing money already puts on a relationship, adding legal obligations to the mix may make things much more complicated.
Co-signing a loan means the debt will also appear on your credit records. Your friend or relative's failure to make a payment on time may also be shown in their credit reports and hurt your credit ratings. Your debt-to-income ratio (DTI) may grow if you guarantee the applicant's loan. The DTI is an important metric for many loan providers to look at. This can get tricky when you are applying for a loan for personal reasons.
Know that the following applies to the borrower and not the co-signer. However, you can convey these methods to them as they benefit you.
They should be able to get a car loan without a co-signer if possible. However, by enlisting the support of a reliable friend or family as a guarantor, they may acquire the auto loan they need to drive to work, therefore giving them time to improve their credit score and increase their income, two crucial considerations in getting approved for a loan on their own. Aside from these, they may consider the following:
The size of the loan they'll need and the amount of interest they'll pay can be reduced if they save enough for a down payment on a car. Ask them to plan their monthly payments and pay a big down payment when the time to make the purchase. There are several advantages associated with making a larger down payment, the most notable of which is a lower monthly payment on the loan.
Before applying for a vehicle loan, know that it's smart to get familiarized with credit reports. Get a free copy of the credit report from each of the three major credit bureaus. Credit monitoring is provided at no cost by these bureaus, and it will notify them of any changes to your credit report or account balances. They'll have constant access to this information, allowing you space to improve your credit rating.
There are a lot of lenders who accept co-signers, so that it might lead to a paradox of choice. Try a bank where the borrower already has an account. Credit unions and banks often have some of the best rates on auto loans, and if you're already a customer, they may even give you a discount.
You can use an online calculator to check your monthly payments and compare multiple lenders. Lastly, you could get in-house financing through a car dealership, but this should be your last option since dealership loans tend to be the most expensive. You can use apps like Way.com and get access to the network of lenders.
When you decide to co-sign for a car loan, you are fully liable for the whole loan amount in the event of failure. If you can handle it, then no worries. But if not, it's better to stay away from co-signing. If you do this, you might lose your buddy or family member and money. Don't be vague about why you're not co-signing.
For instance, you may help them find an affordable vehicle that needs a correspondingly smaller loan. Also, you may increase their chances of getting accepted for a vehicle loan by lending them money for a down payment. This way, you can help your friend, and you won't have to worry about co-signing a loan.
A co-signer's credit has to be extremely outstanding or exceptional (670 or higher). However, this isn't always a requirement.
If you sign your name to a loan agreement as a co-signer, you are equally responsible for its repayment. Co-signing a loan does not imply becoming a personal reference for the borrower. Your pledge to repay the debt in full is what a "co-signer" is promising to do. You run the danger of having to make up for any missing payments right now.
If a borrower already owes a lot of money, the lender may refuse to provide more credit. Cosigning for a large loan, such as a school loan, vehicle loan, or mortgage, can put the co-signer in financial jeopardy. A co-signer may be turned down for a significant loan if they require it soon after co-signing.
As much as they would want to, a co-signer cannot take control of a vehicle they have guaranteed. There is no way for a co-signer to acquire possession of an automobile without the permission of the principal borrower.
The co-signer will be discharged once the previous debts have been repaid. After refinancing, the new debt responsibility is completely with the original borrower.