Pros and Cons of a Cosigner on an Auto Loan
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If you have little to no credit history, or if your credit history is less than perfect, you may need a cosigner to qualify for an auto loan.
A cosigner on an auto loan agrees to take full legal responsibility for repaying the loan if you can’t pay it back. Having a cosigner gives a lender extra assurances that the loan will be repaid.
While a cosigner can help you get an auto loan, they’re taking on risk. We’ll start you off with some pros and cons as we discuss what you and your potential cosigner need to know before making this commitment.
- Auto loan cosigner pros and cons
- Why you might need a cosigner on an auto loan
- What are the responsibilities of the cosigner on an auto loan?
- Which lenders offer auto loans with cosigners?
- The bottom line
Auto loan cosigner pros and cons
You should always consider the positives and negatives of cosigning before asking someone to help when you apply for an auto loan.
- Helps you buy a car when you can’t qualify for financing on your own
- Gives you the opportunity to start establishing credit or rebuilding your credit as you make on-time payments on your loan
- You may qualify for a lower interest rate, which could save you money on your monthly repayments
- Possible damage to your cosigner’s credit if you miss loan payments
- The cosigner may have to pay late fees and collection costs and may face legal action if the loan is unpaid, including being sued and having their wages garnished
- Potential damage to your relationship with a loved one if you fail to repay the loan
Why you might need a cosigner on an auto loan
A cosigner — usually a close family member or loved one, such as a spouse or a parent — may help you qualify for a loan if you’ve been denied, or if you’re looking for a better interest rate.
If a lender views you as a high-risk borrower, it might ask you to find a cosigner before approving you. Some of the reasons a lender would not approve you on your own include:
- You have negative information in your credit reports or too little credit established
- Your history of employment is unstable or isn’t long enough
- Your debt-to-income (DTI) ratio is deemed to be too high
While it’s common to seek a cosigner who has good credit, your cosigner’s credit history and income history don’t necessarily need to be perfect.
Joel Ohman, a certified financial planner and founder of CarInsuranceComparison.com, said the most important thing — from the lender’s point of view — is that you have a second person for repayment.
It’s common to have a cosigner, so lenders tend to offer a quick, streamlined process. But Ohman cautions that it’s important to step back and examine the seriousness of the commitment.
Even though a cosigner has no ownership rights to your car and the cosigner’s name does not need to appear on the title, the cosigner still agrees to take full responsibility for the loan. In other words, the cosigner has to make all the payments if you fail to do so, but they would need your permission to use the vehicle.
Cosigners have the right to see monthly account statements and late notices, but the cosigner may need to get a written agreement from the lender before being granted access to these documents. Other rights will vary depending on state laws.
If you’d prefer an arrangement where you share equal rights with another applicant, you may want to consider finding a co-borrower instead of a cosigner. Co-borrowing is a formal, legal agreement to split the rights to the vehicle. This might be a more fitting arrangement for someone like a spouse who plans to use the vehicle on a regular basis and will contribute to monthly payments.
What are the responsibilities of the cosigner on an auto loan?
“There’s sometimes a misconception in thinking that cosigning is as simple as a character reference,” said Ohman, but it’s not just about vouching for your ability to repay the loan.
Instead, the cosigner is lending you their good credit history and taking equal responsibility for the auto loan contract.
Both parties will have to submit similar information to the lender, and the cosigner will likely be subject to a credit check, too. The documents and information you’ll need to present can vary by lender, but they generally include the following:
- Driver’s license
- Proof of income
- Verification of address
- Social Security number
Once you’ve been approved, there are several important responsibilities that you’ll take on together. The first is financial responsibility.
As the primary borrower, you’re required to make loan payments, but the cosigner is on the hook if you stop paying. As we’ve noted, the cosigner could be subject to late fees or collection costs, including being sued, if you fail to make payments. They can also be required to pay back the loan if you file bankruptcy or die.
Lenders may also include the loan in your cosigner’s DTI ratio, which calculates your monthly debt payments and divides them by your gross monthly income. If it pushes your cosigner’s DTI over 36%, this could result in a lender denying the cosigner’s future loan applications.
Both parties also face credit liability. Information about the loan will appear on your credit reports, as well as the cosigner’s reports. If a payment for the loan is missed, it will affect both of your credit scores negatively and appear on each of your credit reports for seven years.
Another factor for both parties to consider is insurance liability. Requirements vary by state and lender, but the cosigner likely won’t need to have their name on the insurance policy unless they elect to add their name to the title. Ohman recommends, however, that even if a cosigner’s name isn’t on the policy, they should check to make sure the owner has at least the minimum coverage required by the lender and the state.
While it’s not a formal responsibility, both of you should consider the long-term commitment you’re making to each other. If you as the primary borrower take on a loan with a six-year repayment term, any bad decisions you make during that period could negatively impact your cosigner.
Which lenders offer auto loans with cosigners?
If you’re looking for a lender who accepts cosigners, you’ll have plenty of options. It’s common for lenders to allow applications with a cosigner, so it’s best to shop around and compare offers to find the best deal.
A great place to start is through your bank or credit union, since you may be able to access special benefits as a member or customer.
Bank of America, for example, allows applications with a cosigner and can offer you a decision in as little as 60 seconds. State Farm, which offers auto loans online, allows cosigners as well.
You can also go through a credit union such as Provident Credit Union, which accepts applications online or at one of its branches in California. This credit union doesn’t require you to become a member before you apply.
Another option is to go directly to a dealer for financing. Dealerships can submit applications to lenders on your behalf, or offer in-house financing, though you should practice caution if you go the latter route. While in-house financing can mean less stringent requirements for getting a loan, they may come with major drawbacks, including higher interest rates.
The bottom line
Cosigning can be a great way to help a loved one build their credit, but it’s also a very serious commitment that could have a long-term impact on the relationship.
As the primary borrower, it’s important for you to be honest with your cosigner about their responsibilities.
Ultimately, you should make sure your cosigner is financially prepared for a worst-case scenario in which they have to take on full responsibility for the loan repayment.