If you are looking to purchase a new car with less than ideal credit, your auto lender may ask that you bring on a cosigner. A cosigner must meet certain requirements, which includes having a healthy credit score along with a stable and secure form of income. Having a cosigner on your auto loan application is a great way of increasing your odds of approval.
So what is the cosigners responsibility when it comes to an auto loan? A cosigner’s job to act as a “balancer”, helping the primary auto loan applicant increase their chances of getting approved. Although requirements can vary from lender to lender, most lenders will require a cosigner if you have less than perfect credit or have a limited credit history.
A cosigner can also benefit from their role. When the primary borrower pays their auto loan payment on time and in full, your credit score will increase.
Although being a cosigner is a great way to increase your odds of approval for an auto loan, many people are not comfortable with the potential downsides to cosigning. Some main drawbacks that result from cosigning include:
The Cosigner Must Pay if the Borrower Doesn’t
Being a cosigner is risky business. As a cosigner, you are legally obligated to make payments on the auto loan if the primary borrower fails to do so. When you cosign, you also allow the main borrower to “use” your credit. If payments are late and the primary borrower falls behind, your credit score will be affected as well.
Harder to Get Credit
Even as a cosigner, the debt you cosigner for will be added to your credit report as an “obligation”, meaning it must be paid. If the cosigner is looking to apply for a new line of credit, the potential lender will factor in the cosigned loan as a debt. This will have an effect on a cosigners debt to income ratio, an important ratio used by almost all lenders.
The only way to remove a cosigner is by refinancing. Once the loan document is signed, a cosigner cannot simply leave the arrangement. If the primary borrower does not qualify for refinancing, the cosigner will be stuck with the loan on their credit report.
All in all, cosigning is a risky business, and should only take place if you have a significant relationship with the person you are cosigning for. If you are looking to buy a new car but are in need of financing, CrediReady can help. Our nationwide network of trusted dealers and verified lenders work with buyers in all credit situations. Take a moment to fill out our free no-obligation loan inquiry form and start shopping for your dream car today!