Using a Cosigner to Secure Approval for Your Car Loan
People with poor credit, bad credit or no credit may increase their chances of securing an auto loan with a cosigner. The cosigner provides the guarantee to the bank that the person requesting the loan will make their payments to the lender on time. If the primary borrower cannot make the payments, the cosigner agrees to make the payments. If neither party can make the payments, they will default on the car loan.
There are some basic requirements that lenders require for cosigners. Some of the most common requirements will be listed:
Cosigner Must Be Credit Worthy. If the borrower’s credit is challenged, the cosigner should have an excellent credit score. Generally, a rating of 700 or greater will qualify a person as being a co-signer. People with a credit score of 700 or greater typically pay their bills on time and are fiscally responsible people.
Proof that Your Cosigner Can Pay. Cosigners cannot just have good credit. They must prove that they have the ability to assume full responsibility for the car loan, if the primary borrower cannot pay. This will require pay stubs for the cosigner’s employer. Self employed cosigners may require income tax returns from previous years. Lenders will not approve someone if they cannot prove they are financially able to pay the loan.
Stable Employment History and Residence History. Some lenders want to see stability in the borrower’s and cosigners place of residence. Lenders view these people as being well established and having roots in their community. Cosigners that have lived at one address more than five years are generally looked upon more favorably than someone that has moved several times in over five years. Lenders will place a significant weight on the cosigner meeting the stability requirement when deciding whether or not to approve the person.
Cosigner Must Be Committed to Cosigning the Loan. Lenders need more than a verbal agreement or a promise from a cosigner that they will sign the loan. They need the cosigner to sign a contract stating that they agree to pay all of the amounts due on the loan if the borrower cannot pay. If the cosigner is not willing to sign a document stating their responsibilities as a cosigner, the lender will not approve the loan. Do not waste your time or the lenders bringing a cosigner to the lender that has no intentions of following through with the deal.
What are the Advantages of a Cosigner?
Most people with poor credit or no credit history will be charged exorbitant interest rates if they are approved for a car loan. Using a trusted friend, business partner or family member as a cosigner will increase the borrower’s chances of obtaining better terms on the loan and allow the borrower to rebuild their credit.
A few of the advantages will be explained in detail below:
Better Interest Rates. Lenders will often give people with poor or challenged credit an auto loan, but the loan will have interest rates above 20%. This is an exorbitant amount of interest that may easily put the borrower in a situation where they owe more than the car is worth. Selecting an interest rate of 20% or higher is not the wisest decision, but some people need a vehicle to remain employed. Lenders recognize the need and take advantage of the situation.
By securing a cosigner with good credit, the borrower may be able to obtain rates as low as 0%. This puts the borrower in a better situation financially, because their monthly rates are suddenly so low. This allows borrowers to save money and rebuild their credit.
Allows Borrowers Time to Rebuild Credit. Again, lower interest rates and monthly payments provides people with poor credit time to pay off their other bills and reestablish their credibility with other lending institutions. People that pay their bills on time with a cosigner will regain the trust of lenders, and they may be able to obtain a loan on their own, when their credit score improves.
Allows Borrowers to Learn From Someone with Experience. Often having an older person or more financially secure person as a cosigner gives the borrower a guide to follow. This person may act as a gentle nudge to remind the primary borrower of their fiscal responsibilities. Cosigners thus become coaches or experienced guides to lead the primary borrower along the road of good credit.
Additionally, many borrowers become more conscientious if someone else’s credit and livelihood is at stake. Potentially, a borrower may damage the credit of their cosigner, if neither of them can meet the financial obligation.
The cosigner may help the borrower learn about good financing and also help them select a vehicle that is right for them. First time borrowers may be inexperienced and not irresponsible. Since lenders have no data points, there is no way to know whether the first time borrower will be responsible or not. Cosigners may be instrumental for both first time borrowers and people with challenged credit.
What are Some of the Disadvantages of a Cosigner?
Cosigner is Responsible for the Debt. In many instances, borrowers and cosigners find ways to maintain a positive relationship throughout the duration of the loan. If the borrower becomes irresponsible for any reason, the cosigner may be put in a financial bind if they are required to cover the financial obligation of the borrower. This is a disadvantage for the cosigner that may put undue strain on the friendship, partnership or familial relationship.
Cosigners will be the primary title holder until the vehicle is paid in full. At that time, the cosigner may transfer the vehicle into the name of the primary borrower. Until the primary borrower has the title, the cosigner is responsible for the vehicle. If the borrower is involved in an accident, the cosigner may be held accountable for costs associated with the accident if the vehicle is not properly insured or if the person is being sued.
Relationships May be Damaged Irreparably. If the borrower is unable to meet his or her financial obligations, then he or she may put a strain on the relationship between the borrower and the cosigner. Many relationships are ruined because of financial disagreements. Both parties should respect one another and ensure that the financial obligations are met to the best of their ability.