What is a Cosigner for a Car? The Lowdown on Cosigning a Car Loan

Buying a car is an exciting milestone, but it can also be a daunting financial commitment, especially if you’re exploring options for financing.

Credit can be a barrier to getting the vehicle you need. If your credit report isn’t where you want it to be, it can be harder to get a car loan.

Even if you don’t have a good credit score yet, it’s still possible to get your dream car.

If you’re considering getting a cosigner for your auto loan or someone has asked you to cosign for them, it’s essential to understand all the details and responsibilities you both have.

What Does it Mean to Have a Cosigner for a Car?

A co-signer is generally someone who has a stable income and good credit history who agrees to be responsible for the debt if you cannot make payments. This might apply to a credit card or rental application.

Co-signing a car loan means having another person (the cosigner) agree to share responsibility for the auto loan with the primary borrower (you) by signing the loan agreement.

This arrangement provides lenders with extra confidence that the car loan will get paid back, particularly if you have a limited credit history or a low credit score.

Essentially, the cosigner is legally obligated to repay the auto loan if you miss the payments yourself. As you may have guessed, both you and the cosigner have to understand the terms in the loan contract before signing.

When Do You Need a Cosigner for an Auto Loan?

Auto lenders may need you to get a cosigner on an car loan for some of these reasons:

  • Limited Credit History: If you have a short credit history or no credit at all, lenders may require a cosigner, since on paper they’re lending to someone without a proven track record of managing credit.
  • Low Credit Score: A low credit rating can make it hard to qualify for auto loans on your own. A cosigner with a good credit score can boost the primary borrower’s (your) chances of loan approval and odds of getting better terms.
  • Insufficient Income: If your income is below the minimum level for approval, a cosigner with a higher income can help your loan application. Your debt to income ratio can play a role too. Auto lenders often require a cosigner when the primary borrower’s debt to income ratio exceeds their preferred threshold, typically preferring a DTI below 36%.

Pros of Co-Signing for a Car: How Does a Cosigner Help on Auto Loans?

Having a cosigner for an auto loan offers several benefits:

  • Access to Financing: Allows individuals with limited credit history or a poor credit report to access auto financing.
  • Better Loan Terms: A cosigner’s strong credit profile can potentially save you money in the long run because of lower interest rates and getting more time to pay your loan back.

Cons of Co-Signing for a Car Loan

Financial Responsibility: Cosigners on a car loan are equally responsible for auto loan repayment. If the primary borrower defaults, the cosigner’s credit and finances are at risk.

Late or missed payments can negatively impact you, the primary borrower, and your cosigner. Both of your credit scores can take a hit if payments are late, so remember the importance of timely monthly payments.

Strained Relationships: Cosigning a car loan or any other loan can strain relationships if you experience issues with loan payments or you have disputes over financial responsibility.

Involving a family member as a cosigner adds another layer, since your finances and family dynamics could take a hit.

How Does Co-Signing a Car Loan Affect Your Credit?

Co-signing a car loan impacts your credit and your cosigner’s credit:

  • Credit Reporting: The auto loan appears on both credit reports. Positive payment history can boost credit scores, but missed payments or defaults can damage credit profiles. Both you, the primary borrower, and the cosigner are responsible for making monthly loan payments on time to avoid negatively impacting their credit report.
  • Credit Utilization: Managing loan payments effectively is crucial since the auto loan amount contributes to the cosigner’s total debt and credit utilization, factors that affect their credit scores. Being diligent about monthly payments helps maintain a healthy credit utilization ratio.

Improve Your Own Credit Score

If you’re considering cosigning an auto loan or have been asked to cosign for someone else, it’s essential to focus on improving your credit score, especially if you have bad credit:

  • Timely Payments: Make on time payments to demonstrate responsible credit management.
  • Reduce Debt: Pay down existing debts to lower your credit utilization and improve credit score over time.
  • Check all Your Credit Reports: There are 3 credit bureaus, Experian, Transunion, and Equifax, and each one will give you a different score.

Kikoff offers a couple great ways to build credit safely, quickly, and easily. 

  1. The Kikoff Credit Account lets you build up a good payment history.
  2. Our Secured Credit Card works like a checking account and debit card. You set the credit limit of the card with an initial deposit, so you never have to worry about overspending or due dates.

Designed to be affordable and accessible, Kikoff can help you improve your credit – starting at just $5 a month.

Hit the Road!

Auto loans are a long term financial commitment. Cosigning an auto loan could be a good option for you if you have a limited credit history or bad credit. However, it’s important to understand all the pros and cons involved, for both you and your cosigner.

Both you as the primary borrower and your cosigner should communicate openly and learn about the impact on your credit scores and financial stability before entering going forward with your car loan application.

By making informed decisions and being proactive with steps to improve credit, you can navigate the auto loan process more effectively, whether you have a cosigner or not.

Kikoff is here to help! Whatever your long term goals are, Kikoff provides fair, effective, and simple tools that empower you to meet your financial goals.