How useful is a co-signer when taking out a car loan?

If your income is limited or your credit score needs to be improved, getting a car loan with affordable monthly payments can be difficult. Having a co-signer in your loan, however, can make a big difference.

When you have a co-signer this person’s income and credit profile are taken into account and the loan terms offered to you are likely to be much more favorable. In some cases, having a co-signer can even make the difference between approval for a loan or rejection.

How a co-signer helps when getting a car loan

Using a co-signer to apply for a car loan can give a huge boost to your application and ultimately improve the loan terms offered to you. This is especially true for those who are just beginning to build their credit profile and have a limited repayment history for lenders, as well as for applicants whose The credit score is less than ideal. When you have a co-signer, that person’s income and credit history are also considered part of the application.

In short, a potential lender will consider your co-signer’s ability to repay the loan on their own. If your co-signer has a good credit score of 670 or higher and higher income than yours, you will need to be approved for better loan terms. This is because having a co-signer gives the lender extra assurance that the loan will be repaid even if you can not make payments.

Co-signers and minimum income requirements

Lenders usually have minimal income requirements for loan approval. As a claimant, it is solely your income that the lender will consider when determining whether you meet these requirements. Your co-signer’s income will not be included in this part of the application – your co-signer’s income is not added to yours to help you meet the minimum income threshold.

However, a co-signer must be able to prove that he or she has enough income to make the monthly car loan payments in the event of default for any reason. The key point to understand as a prospective car buyer is that if you need more income to qualify for a loan, the co-signer is unlikely to be the solution.

Co-signature versus borrowing

There is an important difference between having a co-signer in your loan and having a co-borrower, who is sometimes referred to as a co-applicant. It is important to understand how these two approaches to buying a vehicle differ.

When you have co-signers, this person does not own the vehicle. They just agree to intervene and make car payments if you can not.

A co-borrower, on the other hand, is someone who shares ownership of the car. From the moment the loan is started, the co-borrower is just as responsible as you for the payments. In addition, when taking out a loan with a co-borrower, any assets used to secure the loan, such as a house or a car, may belong to both co-borrowers.

When you should not have a co-signer in a car loan

Using a co-signer to approve a car loan is a step that should be carefully considered before applying. In some cases, it may not be a wise move for your needs and financial situation.

The car is not in your budget

If the car just is not within your budget, even at a lower interest rate, it is better to give up buying a car altogether. You may want to stop buying the car until you save more money on a larger down payment so that the loan amount is more in line with your income and your monthly budget. The other option is to look for a used car at a lower price if you need a vehicle sooner rather than later.

You may also want to consider whether your credit score can be improved, which will help you to have a better interest rate and more affordable loan payments yourself.

Your relationship may be strained

Having a co-signer on a car loan can be slippery if problems arise in your relationship. It can also aggravate the relationship if you are late on loan payments and your co-signer is called upon to rescue you financially.

The bottom line

Having a co-signer to help you with a car loan application can make the approval process easier. In many cases you will end up with more favorable loan terms, which can make the car more affordable for you every month. This can be especially helpful if you are just starting out and need to improve your credit score.

However, before you use a co-signer to apply for a loan, consider your options, including saving a larger down payment to make your car purchase more affordable for your budget or improving your credit score so you can earn more competitive interest rate.

Leave a Comment