How Does Co-signing for a Car Loan Work?
You may have heard people use the phrases “cosign for a car” or “auto loan cosigner,” and wondered what they mean and how cosigning a car loan works.
A co-signer is another person who also accepts full responsibility to pay back a loan. The co-signer is obligated to pay any missed payments and even the full amount of the loan, if the primary borrower doesn’t pay. Having a co-signer on your loan gives the lender additional assurance that the loan will be repaid.
For people with no credit history or bad credit, having a co-signer makes it easier to get a car loan. For example, young adults who don’t have an established credit history can get a car loan to buy their first car, by having a parent as a co-signer on the loan. If the parent has good credit, the loan is even more likely to be approved.
While the primary borrower is responsible for making loan payments, the loan debt will appear in both the primary and co-signer’s credit history.
The co-signer should be fully aware that, because the debt is in their name too, they are responsible for paying the monthly loan payments or repaying the entire loan balance, should the primary signer default.
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Buying a car with a co-signer can make it easier and cheaper to buy a car, but how does the process work? CU SoCal explains what you need to know about having someone co-sign your loan and being a co-signer yourself.
What it Means to Be a Co-Signer on a Car Loan
The auto loan co-signer equally accepts the loan debt responsibility along with the primary borrower, the person who will own and drive the car.
Three things every co-signer should know:
- The cosigner is responsible for paying back loan if the primary signer stops paying or is unable to pay.
- The loan becomes part of the co-signer’s credit history.
- It’s hard to get removed from the loan.
Co-signing a loan
How Does Co-Signing a Car Loan Affect Your Credit?
can help or hurt your credit scores. Having a co-signer on the loan will help the primary borrower build their credit score (as long as they continue to make on-time payments). It could also help the co-signer build their credit score and credit history, if the primary borrower makes on-time payments throughout the course of the loan. Late or missed payments on a loan will damage the credit of both the signer and co-signer.
How Much Does a Co-signer Help on Auto Loans?
Co-signing a car loan makes buying a car easier and more affordable for the primary borrower. According to the credit bureau Equifax, having a co-signer with good credit scores will make the interest rate and other terms more affordable. This is because having a co-signer reduces the amount of risk the lender is taking by providing the loan. Less risk for the lender equals more reward for the car buyer – in the form of a lower interest rate, for example.
Before Co-Signing on a Car Loan
If someone asks you to be their co-signer on a car loan, consider whether this will be a safe financial move for you. Here are some important questions all co-signers should consider before they sign the loan agreement:
- How well do you know the person you will co-sign for?
- Do you trust the person you're signing with?
- Does the primary borrower have a steady and secure job?
- Does the primary borrower have a history of responsible spending?
- Can you afford to make the monthly loan payments or pay of the entire debt if the primary signer can’t pay or refuses to pay?
- Are you ready to make a long-term financial commitment?
- Are you willing to keep track of the loan to ensure payments are being made and made on-time?
Auto Loan Co-signer Requirements
The requirements for co-signing an auto loan are the same as those required for any car loan application:
- Good Credit Standing: The lender will ask permission to look at each person’s credit scores and credit history.
- Proof of Ability to Pay: Your co-signer will be required to produce evidence of sufficient income and/or assets to cover the amount of the loan obligation, in the event the signer doesn’t pay. The bank or lender may require pay stubs for employed co-signers; if the cosigner is self-employed or a business owner, the bank may require income tax returns for previous years. If your co-signer cannot prove that he/she is financially capable of paying the obligation, the bank or lender will deny the loan application.
- Stability in Employment and Residence: When looking at co-signers, banks like to see individuals that are well-established and have roots in their community. They favorably view co-signers that have lived at one address for five or more years and have worked at their present job for a relatively long period of time.
Should You Be a Co-signer?
There are pros and cons to being a co-signer on a car loan. Carefully consider each and determine which is best for your unique situation.
- Help a family member or friend get the car they need could mean giving that person a means to earn income and have autonomy. Having a car is often the only way someone can get to a job.
- Parents can help their children establish good credit by co-signing a car loan. As the young adult makes on-time payments over the life of the loan, their credit history will be established and a good credit score along with it.
- You can build your credit score and credit history, as long as the primary signer pays back the loan responsibly.
If the primary signer stops paying the loan, misses payments or makes late payments, the co-signer is responsible for the loan payment. The credit bureau, Equifax
, offers these cautions regarding cosigning a loan:
Important Note from Consumerfinance.gov:
- Co-signing could limit your borrowing power. Potential creditors decide whether or not to lend you money by looking at your existing debt-to-income ratio. Depending on how much debt you already have, the addition of the cosigned loan on your credit reports may make it look like you have more debt than you can handle. As a result, lenders may shy away from you as a borrower.
- Co-signing could lower your credit scores. Because that debt shows up on your credit reports as if it were your own, your credit scores will be affected by any late or missed payments. If the borrower stops paying altogether and the loan goes into collection, that could also go on your credit reports, and the bill collectors could come after you to get their money. Lenders or collectors could even sue you, garnish your wages or put a lien on your property in an effort to collect the balance of the debt.
- Co-signing could damage your relationship with the borrower. You should also consider how cosigning a loan might impact your relationship with the borrower. You’ll be tied to this person, and any possible financial upheavals, for the term of the loan, whether that’s six months or 10 years. You’ll be responsible for repayment if the borrower has financial difficulties or if something else goes wrong, and your relationship could suffer.
Co-signing a loan may also affect your ability to obtain loans for yourself because you have taken on the obligation to pay the loan. Lenders ask for a co-signer when they do not want to take on the full risk of loaning money to a particular primary borrower. Read the terms of the loan and consider carefully whether you wish to take the risk of co-signing.
Should You Co-sign a Car Loan?
If you, the co-signer, have a high level of confidence in the primary signer, and this confidence is backed by their solid employment record and income, then cosigning a loan for that person could be a great way to help a young adult, friend, or partner.
Should You Ask Someone to Co-sign a Car Loan with You?
Before you ask a family member or friend to co-sign a car loan, be sure you have the income and emergency funds saved to make all of monthly payments, and to do so in a timely manner. If you have any doubt that you will be able to manage the loan, then purchasing a car at this time is not a good idea.
If you cannot make the monthly loan payments, then the financial burden will fall on your co-signer, which could hurt them financially, negatively affect their credit score (and yours), and damage your relationship with them.
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We are known throughout the area for our excellent Member service and we are proud to be serving the community where we work and live.
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