If you have very poor credit or are just getting started on building your credit history, having a cosigner on an auto loan provides a pathway to car ownership. It can be a lifeline for people who need a car to get to school or work or to run family errands but lack the creditworthiness to secure a loan on their own.
In this blog, we’ll take a look at when having a cosigner on your auto loan makes sense and we’ll answer common questions about how cosigning works such as what the requirements are for being a cosigner, how having a cosigner affects your loan terms, and the difference between a cosigner and a co-borrower. Read on to learn more.
Why Do I Need a Cosigner for a Car?
Getting the affordable auto financing you need can be difficult if you lack good credit. For this reason, it’s fairly common to have someone cosign on a loan to help get you rolling down the road sooner rather than later.
While the loan will primarily be in your name, and you will have full ownership of the financed vehicle, having a cosigner on your paperwork gives your lender more confidence that the money they are lending will be repaid in full.
By cosigning on your loan, your cosigner is essentially guaranteeing your loan by agreeing to pay back what you owe if you can’t. They are using their own good credit to back up your lack of creditworthiness.
When done correctly, cosigning can be a crucial tool providing you access to a valuable asset that lets you take advantage of new opportunities—while also improving your credit over time.
How Does Cosigning Work?
Cosigning a loan is a serious responsibility. Your cosigner shares full responsibility for loan payments and there is a real possibility they will be required to step in to pay much or even all of what is owed on an auto loan if you are unable to.
Your cosigner will sign your loan paperwork at the same time you do and will have to provide much or all of the same information as you will. This may include:
- Online credit score checks
- Providing proof of identity and address
- Providing proof of employment, income, or savings
- Providing details about other loans or debts.
What If I Miss Payments?
Your cosigner will also feel the same impact if you start to fall behind on making payments or even miss payments on your loan. This may include:
- Missed payment records on both of your credit reports
- A drop in both of your credit scores
- Calls from lenders and collections agencies
Ultimately, your cosigner might be responsible for taking over payments when you can’t or might have to pay off the rest of what you owe. If they are unable to do this, then both you and your cosigner could have legal action taken against you and possibly even have wages taken from your paycheck.
Smart Cosigning Practices
Given this, a cosigner is typically a parent, guardian, caregiver, or close family friend of the person needing the loan. Whoever they are, a cosigner should be clear about the real ability of the person they are signing for to make full, on-time payments over the life of the loan.
They should also be in consistent communication with the person they have signed for, checking ahead of time that they can make current and upcoming payments. In most cases, a wise cosigner would rather lend money to make payments than face a default on the loan itself.
It’s also wise for a cosigner to make sure the car’s owner is using, insuring, and caring for their car responsibly. In the event of a default, the cosigner might decide they prefer to sell the car rather than continue to make payments.
When Does Cosigning on a Car Make Sense?
Cosigning is relatively common in auto financing, simply because having a vehicle is often a necessity for people even if they cannot currently afford to pay for a vehicle on their own. When do you need a cosigner for a car? Some of the major reasons people opt for a cosigner on their loan include:
- Bad credit: Bankruptcy, divorce, imprisonment, or irresponsible borrowing in the past might mean you can’t access car financing on your own. In cases like these, a cosigner can help secure a loan from a reputable lender and help you get the wheels you need.
- A short credit history: Sometimes a borrower needs a car but has not had time to build up the necessary credit history to ensure a good score. This is a common barrier to car ownership for young people starting a job or leaving home to attend college.
- Low income: Along with poor credit, insufficient income can also make it difficult to access car financing. This can be a real trap if you need a car simply to get to work or to perform your job so that you can earn income in the first place.
- Little or no down payment: Lack of ready cash can put financing out of your reach even if you have reasonable credit. Most reputable lenders require you to put at least some money down.
- Unaffordable rates: If your credit rate is marginal or you lack ready cash, you might be able to access an auto loan on your own, but at a high annual percentage rate (APR) that would make monthly payments unaffordable.
- To avoid a long loan term: Similarly, you might be tempted to make your monthly payment more affordable by agreeing to a longer loan term. A cosigner on your loan might help you save on interest over time or prevent you from owing more on your loan than your car is worth.
Cosigning and Age
Cosigning can also be important in giving young people the responsibility of owning and paying for a car while sheltering them from at least some of the risk that comes with taking out a loan.
A cosigned loan gives a young driver full responsibility for operating, maintaining, and caring for a vehicle along with the full responsibility of making payments on time, ideally with an APR and loan term that will not hold them back financially.
It also allows them to build their credit while ensuring they will not lose their vehicle or suffer long-term financial consequences if their financial situation changes.
And, while you need to be 18 or older to sign up for a loan by yourself, cosigned auto financing can be extended to drivers as young as 17. This can be helpful for families who need or want a young driver to have a car in their own name, or for teens who are eager to get a head start on paying for their own vehicle.
Frequently Asked Questions
Here are a few other frequently asked questions about cosigning on auto loans.
1. What is the difference between a cosigner and a co-borrower?
It’s important to be clear about the difference between a cosigner and a co-borrower. A co-borrower, or co-applicant, applies jointly with you for an auto loan. You will both be responsible for paying the loan and will usually own the vehicle jointly.
A cosigner only guarantees debt on your auto loan debt and is only responsible if you default on a payment. They do not own your car and are not responsible for upkeep or repairs.
2. What credit score is needed to buy a car without a cosigner?
There is no set credit score above which it is possible to buy a car without a cosigner. Instead, you will find you have fewer good lenders to choose from, and will likely end up needing to pay a higher APR or take out a longer loan if your credit score is low.
That said, credit rating agencies divide credit scores into broad ranges considered very good to excellent, good, fair, and poor. Scores that fall below 670 are considered to be fair to poor and are likely to struggle to attract affordable financing without the help of a cosigner.
3. At what point do you no longer need a cosigner?
You may find that you no longer need a cosigner on your loan. This can happen if your financial situation improves or you have paid off a significant amount of the value of the vehicle.
In cases like this you might choose to sell or refinance your vehicle, but be sure that your situation has changed enough that you’ll be able to get similar or better terms on the replacement financing.
It is usually not possible to remove a cosigner from a loan without refinancing.
4. How old do you have to be to not have a cosigner on a car?
You need to be at least 18 to take out a loan in your own name. If you are a licensed driver under 18 then you will need to have a cosigner in order to have your own car financing.
However, many young drivers lack the credit history needed to access affordable financing on their own. In practice, therefore, the minimum age at which you will be able to afford not to have a cosigner on your auto loan may be considerably higher.
Radiant: Financing That Puts You in the Driver’s Seat
Cosigning a loan is a big decision for everyone involved. Done right, however, cosigning can be a smart way to get on the road while building towards long-term financial independence and stability. And, while a trusted co-signer is key, it all starts with access to good quality auto financing options.
Local credit unions do a good job of offering affordable flexible auto financing options that might not be available at dealerships or the big commercial banks. Whether you’re looking to finance alone or with the help of a cosigner, a credit union should be your first stop on the road to vehicle ownership.
At Radiant Credit Union, we are committed to doing everything we can to help our members get on the road in an affordable new or “new to you” vehicle. Whether you are a first-time buyer, a young family, or are looking to buy a car for one of your children, we offer:
- Fast, easy online applications
- Quick loan approvals
- Low rates
- Flexible loan terms of up to 84 months
- Financing up to 120% of the sale price
- No loan application fees or pre-payment penalties
We also offer a full range of products to protect your car and auto loan, including GAP coverage, mechanical breakdown protection, and debt protection.
Contact us today or click below to learn more about how Radiant can get you rolling.