Boost Your Auto Loan Chances: Pros and Cons of Getting a Cosigner
5 MIN READ
Published September 29, 2023 | Updated October 31, 2023
If your credit score is poor or your credit history is thin, getting a car loan can be difficult. One option is to have a cosigner who applies for the loan alongside you and agrees to be equally responsible for the loan. But how much does a cosigner help on auto loans? If the cosigner has a good credit profile and income, lenders may be willing to approve your loan at a good interest rate. But if you default on the loan, your cosigner can be liable to pay, and it may damage your relationship with that person.
What Is a Cosigner?
A cosigner is someone who applies for a loan with you. Lenders will use their financial details and credit history alongside yours to determine your eligibility for the loan. A cosigner is listed on the financing agreement, takes responsibility for the loan, and will be required to pay the loan if you can’t.
How Does a Cosigner Help with Auto Loans?
While you can get bad credit car loans by yourself with poor credit, take the time to learn more about auto loans and the importance of a cosigner before you make the decision. A cosigner’s impact on auto loan approval is listed below:
- A cosigner can improve your chance of getting a loan approval.
- If your cosigner has excellent credit and a higher income, you may be able to get a lower rate. For a new car, the average APR for subprime borrowers is 11.72%, while the APR for prime borrowers is 6.44% in 2023.
- If you get an auto loan with a cosigner and pay it back in a timely fashion, it can help you improve your credit score.
Debt expert and founder of Greenbacks Consulting, Teresa Dodson, weighs in on how a cosigner can improve your chances of securing an auto loan. “If you have a low credit score, having a cosigner can really help you not only get approved but get a more reasonable interest rate. Overall, this can help you improve your credit over time,” Dodson says.
Cosigner and Minimum Income Requirements
Auto loan lenders have minimum income requirements to qualify borrowers. If you are a primary borrower, the lender will only consider your income when they determine your eligibility for the loan. Your cosigner’s income is not a factor in the application to help you meet this minimum income requirement. A cosigner must still prove that they have sufficient income to pay the car loan payments on their own if you default on the loan.
What Makes a Good Cosigner?
Check your lender’s auto loan cosigner requirements to determine who will be a good candidate to apply for the loan alongside you. Here are the most common requirements:
- A cosigner must have good credit standing. Cosigner credit score requirements for auto loans are usually at least 670.
- They’ll need to have sufficient income to cover the loan payments. Lenders will determine the cosigner's debt-to-income (DTI) ratio to evaluate whether they can pay the monthly installment in case you default.
- They must have stable employment and residence. This means that they should have worked at their current job for relatively long and must’ve lived at their current address for five years or more.
Do You Need a Cosigner?
There are only a few reasons why you may need a cosigner to help you qualify for an auto loan:
- You have too much debt when compared to your income. Lenders will evaluate your DTI, and if it’s too high, you may not qualify.
- You have a lot of gaps in employment or haven’t worked for too long.
- Your credit scores are too low, or you have a limited credit history.
If any of these are true for you, you may have to apply with a cosigner.
Cosigner Vs. Co-applicant
There’s a difference between having a co-signer and a co-applicant or a co-borrower for your auto loan. Understanding the difference between these two will help you determine which option is right for car purchase for your financial situation. A cosigner doesn’t have ownership of the car. They only agree to take responsibility for the debt and step in to cover the payments if they are not able to do so. A co-applicant will share the ownership of the car. Once the loan is approved, they will be just as responsible for making payments as you are.
Pros and Cons of Having a Cosigner
If you’re thinking of maximizing auto loan approval with a cosigner, remember that it’s a big decision and may not always be right for you. Weigh the pros and cons listed below to understand if you should go this route.
- If you’re a high-risk borrower with too much debt or poor credit, a cosigner improves your chances of approval from a dealership.
- You may be able to get a lower interest rate and better loan terms on the loan if your cosigner has an excellent credit score.
- You’ll be able to build your credit history and improve your credit score.
- You may have more options to select a reliable, solid car when you apply with a cosigner because you may qualify for a larger loan amount.
- You may end up with an auto loan you can’t afford. Your payments may push your budget, and it may be difficult to get out of the car loan.
- If you miss payments on a cosigned loan, your credit, as well as that of your cosigner, can suffer. Additionally, because of the cosigner’s liability for auto loans, they may have to make the loan payments.
- The loan may complicate your personal relationships. If you foresee any conflict with the individual down the line, it’s best not to get into the loan in the first place.
Tips for Finding a Cosigner for Auto Loans
A cosigner has a lot at stake when they agree to sign on the dotted line. It takes a lot of trust and financial commitment on their part to agree to the arrangement. That’s why you need to be careful about who you ask to be a cosigner. Here are a few basic tips on how to find a cosigner for an auto loan:
- Family members are the ideal first choice because they are usually invested in your success. They may be more likely to help you when you are in need.
- Only consider those family members you are closest to. If you have a solid relationship with them, they may be forgiving if there are any issues in your ability to make payments later.
- Consider the financial footing of the individual before you ask them to be a cosigner. They’ll need to have a good credit score and the ability to make on-time payments if you’re not able to make them for any reason.
- Close friends could be another option, but not many friends will be willing to take on such a big financial commitment. In some cases, simply asking them for this favor may damage your friendship.
The Bottom Line on Cosigners for Auto Loans
Getting a cosigner for an auto loan may make sense if it helps you get approved for an auto loan at the best possible loan terms and competitive loan rates. But before you do, be mindful of what this may mean for the other person involved. Think about how it can impact their finances and credit, and only ask your closest family members or friends to take on that responsibility. More importantly, if you don’t think you can afford to keep up with the monthly payments, getting a cosigner will only make things worse for you. Your relationship with the other person could be permanently damaged, and that’s not a risk worth taking. Consider alternative ways to get an auto loan, such as by offering a larger down payment, buying a cheaper used car, and reducing your debt-to-income ratio by paying off credit cards.