How Much Does a Co-Signer Help on Auto Loans?
Adding a co-signer to an auto loan could make it easier to get approved if you have a poor or limited credit history. Lenders may be more willing to give you a loan when your co-signer has an established credit history and a good credit score. You may also be able to qualify for lower interest rates on an auto loan if the co-signer has a stronger credit rating.
Key Takeaways
- A co-signer is someone who applies for a loan alongside someone else and agrees to be equally responsible for the debt.
- Auto lenders may be willing to approve borrowers with a co-signer if the co-signer has a good credit profile.
- Adding a co-signer to an auto loan can make it easier to get approved if you have poor credit or no credit at all.
- Defaulting on a co-signed auto loan could damage your credit score and your co-signer’s.
How Does Having a Co-Signer Work?
A co-signer on a loan is someone who agrees to be responsible for a debt on behalf of another borrower. When someone co-signs a loan, they’re granting the lender permission to review their credit history and credit scores in order to make an approval decision. If the loan is approved, both the co-signer and the other borrower legally share equal responsibility for the debt.
The co-signer may not make any payments toward the debt. But legally, they can still be held responsible for paying it. So, assume that you co-sign an auto loan for your brother. He agrees to make the monthly payments. But six months into the loan term, he falls behind, eventually defaulting. The lender could come after you to demand payment in full for the remaining loan balance.
Important
Federal rules require lenders to provide co-signers with a written notice detailing their rights and responsibilities before signing.
Co-signed loans can show on the credit reports of the primary borrower and the co-signer. Any payment activity associated with the loan, whether it be on-time payments, late payments, or missed payments, can affect both credit scores.
Tip
Co-signing an auto loan doesn’t give you ownership rights to the vehicle.
When Should You Use a Co-Signer on Your Auto Loan?
There are several scenarios where it could make sense to ask someone to co-sign an auto loan on your behalf. How much having a co-signer can benefit you can depend on the details of your situation.
For example, you might consider using a co-signer for an auto loan if you:
- Have limited credit history because you’re new to building credit
- Have a lower credit score that doesn’t meet the lender’s minimum credit score threshold
- Were previously rejected for an auto loan and would like to reapply
- Don’t have a lengthy work history or an established earnings track record
- Have sufficient credit to qualify for a loan, but are hoping to get approved for a better interest rate
In any of those situations, adding a co-signer could convince a lender to approve you for a loan and/or grant you more favorable loan terms.
Warning
Asking someone to co-sign an auto loan may not be a good option if you’re looking at cars that are well outside of your budget.
Avoid getting a co-signer if you’re worried about how sharing responsibility for debt might affect your relationship with them, or if you have fluctuating income that could affect your ability to keep up with payments.
Benefits of Having a Co-Signer on Your Auto Loan
Is there an advantage to having a co-signer on an auto loan? There can be if the co-signer has a strong credit profile and a good credit score. Having a co-signer can:
- Make it easier to get approved for a loan
- Potentially qualify for lower interest rates and more favorable loan terms overall
Lenders can use credit scores to gauge a potential borrower’s ability to repay what they owe. Having a poor credit score can send the signal that you’re not responsible with finances. Or, when you have a limited credit history or a “thin” credit file that’s insufficient for calculating a credit score, lenders also consider you a risk because you haven’t proven your responsibility.
Adding a co-signer with a good credit score can strengthen your overall risk profile and make it easier to get approved. Lenders may feel more reassured in knowing that the co-signer has a track record of making payments on time.
Credit scores also influence the interest rates you pay for loans. The higher your credit score, the lower the interest rates you’re likely to pay. Again, that’s because lenders assume that you’re more likely to pay back what you owe when you have a better credit history. When lenders see you as a greater risk, they will likely charge higher interest rates.
| Pros and Cons of Using a Co-Signer for an Auto Loan | |
|---|---|
| Pros | Cons |
| Having a co-signer could make it easier to get approved for an auto loan if you have poor or limited credit history. | It may be difficult to find someone who’s willing to co-sign the loan. |
| You may be able to get approved for lower interest rates if your co-signer has a good credit score. | Late payments could damage your credit score and your co-signer’s credit score. |
| Getting approved for a co-signed loan can give you an opportunity to build or rebuild credit in your name. | If you default on the loan, the lender could sue the co-signer to collect what’s owed. |
Whose credit score is used when buying a car with a co-signer?
Lenders can consider the credit scores of both borrowers when co-signing an auto loan. If you have a lower credit score, having a co-signer with a higher score could work in your favor. In terms of which credit-scoring model is used for approvals, that can vary by lender.
What credit score does the co-signer on an auto loan need?
To get approved for an auto loan, co-signers need a credit score that aligns with the lender’s minimum credit score requirements. The minimum credit score needed for an auto loan varies by lender.
Does a co-signer have to be present when buying a car?
The co-signer doesn’t necessarily have to be present during car shopping, but they will need to be there when it’s time to apply for the loan. The lender will need the co-signer’s permission to check their credit for approval. Once approved, they’ll need to sign the loan documents along with the other borrower.
The Bottom Line
Should you get a co-signer for an auto loan? It could make sense to get a co-signer if it would allow you to get approved for the loan and/or get the best terms possible. It’s important to consider the pros and cons first, and what co-signing might mean for the other person involved in terms of how it may impact their credit and finances. Once you find a co-signer, you can take the next step and begin shopping for the best car loan rates.