Introduction
Purchasing a car is a big investment, and this is even truer if you are using auto financing to acquire the car. Applying for car loans is often difficult especially if one has a bad credit score or is a rookie in credit. This is where having a co-signer comes in handy because the co-signer takes responsibility for the loan.
That is why at Automatic Car Credit, we are aware that many people can take a car loan with more favorable conditions if they have a co-signer. So in this guide, we will be taking you through the steps of purchasing a car with a co-signer, the pros and cons so that you can make a wise decision.
What is a Co-Signer?
A co-signer is a person who signs with you to guarantee that he or she will be held legally liable for the car loan in case you default. This is usually a relative or a friend who has a good credit standing and is willing to take the responsibility of the loan. Co-signer helps the lender to ensure that the loan will be paid even if the borrower is unable to do so.
Key Roles of a Co-Signer:
- Liability for the loan:
A co-signer is legally bound to make the payments in the event that the primary borrower fails to make the payments.
- No ownership:
Thus, even though a co-signer is liable for paying the loan, they do not own the car unless they are on the title.
Advantages of Purchasing a Car with a Co-Signer
- Easier Loan Approval
The first and probably the most obvious benefit of using a co-signer is that your chances of being approved for the loan will be higher. People with poor or limited credit history may find it hard to secure loans from lenders because the lenders consider it a risk. However, if the applicant has a good co-signer then the lender is assured that the loan will be repaid thus increasing chances of approval.
- Better Loan Terms
A co-signer can help you secure better loan terms, such as a lower interest rate and more favorable repayment period. This is because the lender views the loan as less risky when a responsible party is backing the loan. With a lower interest rate, you’ll pay less over the life of the loan, saving you money in the long run.
- Opportunity to Build Credit
For borrowers with no credit history or a poor credit score, making regular payments on a loan with a co-signer can be a great way to build credit. As long as you make on-time payments, this positive credit activity will be reported to the credit bureaus and help improve your score over time.
- Access to a Higher Loan Amount
Lenders may offer a larger loan amount when a co-signer is involved, giving you more flexibility to purchase a higher-priced car. This can be especially helpful if you’re in need of a reliable vehicle but don’t qualify for a large loan on your own.
Risks for the Borrower
- Impact on Relationship with the Co-Signer
Entering into a financial agreement with a co-signer can put a strain on your personal relationship, especially if something goes wrong with the loan. If you’re unable to make payments and your co-signer has to step in, it could cause tension and resentment. Be sure to discuss the arrangement fully with your co-signer to ensure you both understand the risks involved.
- Responsibility for Loan Repayment
While the co-signer is ultimately responsible for the loan if you default, you are still the primary borrower. It’s crucial that you make every effort to repay the loan on time. Failure to do so will affect both your credit score and your co-signer’s credit, which can lead to financial problems for both parties.
- Difficulty Refinancing or Removing the Co-Signer
Once a co-signer is on the loan, it can be difficult to remove them from the agreement. If your credit improves over time and you want to refinance the loan on your own, the process can be complicated. Many lenders require that the loan be refinanced entirely, which might involve applying for a new loan at a potentially higher rate.
Risks for the Co-Signer
Agreeing to co-sign a car loan is not a decision to be taken lightly. The co-signer takes on considerable financial risk by agreeing to the arrangement.
- Full Responsibility for the Loan
As a co-signer, you are fully responsible for the loan if the primary borrower cannot make payments. This means that if they miss payments or default on the loan, the lender will turn to you for payment. You will be expected to cover any missed payments, late fees, and possibly even the remaining balance of the loan.
- Impact on Credit Score
Your credit score is also on the line as a co-signer. Any missed or late payments made by the primary borrower will show up on your credit report, potentially lowering your credit score. A damaged credit score can affect your ability to get credit in the future, whether it’s for a car loan, mortgage, or credit card.
- Limited Financial Flexibility
Co-signing a loan may also have its drawbacks, which include the fact that it may reduce your future credit options. Lenders consider a co-signed loan as your debt and therefore may lead to a change in your debt to income ratio. This could harm your credit score and make it difficult for you to be approved for other kinds of credit like a mortgage or a personal loan even if you do not make payments on the co-signed credit.
How to Get a Good Co-Signer
Qualities of a Good Co-Signer:
- Strong Credit Score:
Basically, the credit score of your co-signer should be 700 and above. This will help you obtain loans more often and with better terms as it will raise your chances of getting approved for a loan.
- Financial Stability:
Choose a person who is financially capable of repaying the loan in case you are unable to in order to avoid the loan turning into a long-term arrangement.
- Clear Communication:
Select a person with whom you share a close and healthy communication. There is a need to ensure that both the partners have agreed on the relationship and are in a position to handle the tasks assigned.
How to Purchase a Car with a Co-Signer
- Check Your Credit Report:
It is, however, advisable to also review your credit report even when you have a co-signer so that you have a clue of your credit rating.
- Choose a Co-Signer:
Request for someone who qualifies the requirements and is willing to be responsible for co-signing.
- Apply for a Loan:
Apply for a loan and include your details as well as that of your co-signer. Both credit reports will be reviewed by the lender in order to approve the loan and the terms that will be offered.
- Compare Offers:
Do not accept the first loan offer given to you. Check the interest rates from different lenders so that you can find the best offer.
- Finalize the Loan:
After you have selected the loan, complete all the paperwork. You and your co-signer will have to sign the loan agreement before you can be granted the loan.
- Make Payments on Time:
Ensure that you pay your bills on time to avoid seeing your credit score and that of your co-signer drop.
Bottom Line
Using a co-signer to buy a car can make the process easier, improve your chances of loan approval, and help you secure better terms. However, both you and your co-signer should understand the financial responsibilities and risks involved. At Automatic Car Credit, we’re here to help you navigate the process and ensure you make the right choice for your financial future.