Overview

If you have ever applied for an auto loan or any other type of credit, you may be familiar with the role of a cosigner. Cosigning is when you allow somebody to “borrow” your credit so they can get approved or qualify for a more favorable interest rate.

In this guide to car loan cosigning, we will discuss the responsibilities of a cosigner, finding a proper cosigner, their role, and how you can get out of a cosigning arrangement.


Cosigning Defined

Cosigning has helped millions of Americans qualify for the loans that they need. A person who offers their credit by cosigning for another person is known as the “cosigner”. The cosigner is the person whose credit the car buyer (the main borrower) is borrowing in order to help increase your odds of approval for an auto loan or more.

Whether you are looking to get an auto loan or find financing for your home improvement project, you may be asked to provide a cosigner if your credit score and credit report do not impress the lenders.

Here are some examples of when a cosigner may be needed:

Limited credit history

If the main borrower is young and a first-time car buyer, chances are they have a limited credit history. Lenders like to see borrowers with longer credit histories since their spending habits can be much more predictable.

Poor credit

If you have some credit history, it needs to be good. When you have bad credit, your chances of approval go down significantly. This is the most common reason why consumers are in need of a cosigner.

If you cosign for somebody on a loan, you are then legally obligated to repay theA set of keys next to a cosigner request form loan back if the main borrower fails to repay in full. When cosigning for somebody, you are not just a reference for them, you are serving as a guarantee that the loan will be paid back.

If the person who asked you to cosign on a loan fails to make their payments on time, the lender may have the right to repossess the asset. The late payments and the repossession will not only show up on the main borrower’s credit report, but also that of the cosigner as well.

Again, the cosigner will be held legally liable to repay the debt or face the consequences of negative entries in their credit report.

If the borrower ends up defaulting on the loan, the lender can enforce the same collection methods on the cosigner as they did the main borrower.

A cosigner can be required to repay the entire loan themselves, appear in court, or have their wages garnished if the main borrower fails to make payments. The cosigner may also be required to pay a certain amount of fees and fines for the delinquency on the loan.

If the main borrower defaults, the cosigner can expect their credit score to be heavily impacted by the late payments. Late payments account for 35% of a consumer’s credit score, the single largest factor in affecting your credit score calculation.


Why Cosigners?

Since the recession of 2008, banks and other lending institutions have increased their scrutiny of car loans. If you have a less than perfect credit score, you may have noticed that it is much harder to find a lender who can work with you.

Even if the lender can work with your credit score, they may place a high-interest rate on the money they loan you. This is where a cosigner can be helpful.

If you know you cannot afford the interest rate on a certain loan, you can ask a cosigner to come on board. A cosigner can help increase the chances of approval by guaranteeing the lender that the loan will be repaid if the main borrower fails to make payments.

“Having a cosigner on your loan gives your lender additional assurance that the loan will be repaid”, says the Consumer Financial Protection Bureau.

The lender will want to see if the co signer’s credit score is enough to counteract your less than perfect score.


How to Find a Cosigner

Finding a cosigner who is willing to risk their financial stability for years can be harder than you think. These days, consumers are much more protective over their credit scores and report, so you will have to start with the people closest to you.

Before you begin searching for a cosigner, be sure to ask yourself a couple of questions:

  • Will I really be able to repay this loan back in full with monthly payments?
  • What will I do if I am unable to make a payment?
  • Do I have enough consistent income to cover my other expenses as well?
  • Can I afford the maintenance and insurance for this car?
  • Is the loan for something that is unnecessary? (Like a loaded European sports car)
  • Is this cosigner somebody I can communicate openly with?

If you are a borrower looking for a cosigner, take the following steps.

First and foremost, start by asking close friends and family members. Explain to them your financial situation and why you are in need of a cosigner.

If you have made some bad money choices in the past, explain to your friend or family member on how you plan on improving your financial awareness so that their credit will not be damaged by cosigning for you.

If you’re looking for a cosigner, you shouldn’t be shocked if people say no. MostA woman is happy she was approved with a cosigner people understand the vast responsibility and seemingly endless risk that can be associated with cosigning on a loan.

If a family member or friend seems hesitant, boast about your qualifications as a borrower, such as a steady income with low living expenses. If a family member or friend seems uninterested, its best to bet that they won’t be cosigning with you.

Of course, you want to ensure that the person you are asking to cosign for you has a solid credit score, or else you may be back to square one.

Whoever you ask to cosign, you must be able to communicate and conversate with this person openly. Do not ask someone to cosign for you if you already have a rocky relationship, as cosigning has a tendency to make things much worse, especially when loans go into collections.


Questions a Cosigner Should Ask Themselves

If you have been approached by a family member or friend asking you to cosign on their behalf, there is a good chance you’ve considered it. Before you pull the trigger and cosign for somebody, be sure to ask yourself these questions:

  • Will I be able to make the monthly payments if the main borrower defaults?
  • Am I comfortable having this commitment with me for the next 2-5 years?
  • Do I have open communication with the person asking me to cosign for them?
  • Has the main borrower ever shown signs of bad financial habits?
  • Does the main borrower make enough money to be able to afford the car

Pros and Cons of Cosigning

Pros of Cosigning

  • A chance to have the credit score of the borrower and cosigner increased if the payments are made on time.
  • Much more favorable and affordable interest rates on your loan, especially if you have bad credit
  • Approval from a much larger number of lenders thanks to the boost in credit
  • A buyer can get into a car they wouldn’t normally be able to qualify for

Cons of Cosigning

  • Both the cosigner and the main borrower could have their credit scores tarnished if they main borrower does not pay on time
  • The cosigner could be legally obligated to repay the loan back in full if payments are not made on time and in full
  • A cosigners future borrowing power may be limited as lenders do not like working with borrowers who have cosigned and committed to previous loans
  • Creditors can sue cosigners, garnished their wages, and more if payments are not made on time and in full
  • The relationship between the borrower and the cosigner can be ruined if payment issues arise

How to Get Out of Cosigning

If you have cosigned for a friend or family member and are beginning to have regrets about cosigning, there are a few steps you can take:

Refinance the Loan

Ask the car’s owner (the main borrower) to refinance their loan. When you A man signs off on cosigning documents with his lenderrefinance a loan, the old loan that you cosigned for has been paid off and a new loan begins.

However, you will usually need a healthy credit score to obtain favorable rates. Call lenders in your area to get a quote first.

Call the lender

Although a lender will have no reason to remove you as a cosigner, it doesn’t hurt to call and ask. Know that there is very little chance a lender will remove you from a loan if the loan is already delinquent.

Help the borrower out

Sometimes, one of the most effective ways you can improve your cosigning situation is to help the borrower improve their financial habits. By being responsible with their credit, they could qualify for an auto loan refinance.

Pay it off quickly

You can ask the main borrower to make larger payments. Making larger payments will help to pay off the loan faster. Check with your lender to see if there are any penalties or fees for paying off your loan early.

Sell the car

As a last ditch effort, you can consider selling the car for an amount that pays off the balance on the loan. Although the main borrower (the person you cosigned for) will need to approve the sale. You will both be required to sign off the vehicle title.

Refinance the loan yourself

This can only be possible if you have the funds available to pay for the loan in full. Pay the lender the remaining balance on the loan and work out a payment plan with the main borrower. Make sure that you obtain a contract stating that the car’s owner is indebted to you.


Things to Keep in Mind

Keep Copies

If you have cosigned for somebody, it’s important to keep detailed records on the loan. You should ask the primary borrower (the person you cosigned for) to provide all the legal documents associated with the car and the loan.

Follow Up

Often times, lack of communication between a buyer and a cosigner can cause problems. Be sure that you are in good contact with the main borrower or your cosigner. If you think you might not be able to make a payment, call your cosigner right away to discuss options.

Get ready

In all honesty, cosigning has a lot of downsides for very few upsides. Since a cosigner is fully responsible for paying back a loan, be sure you have enough money to make a payment on behalf of the main borrower if they fail to pay. If you cannot afford a $200/month payment, do not cosign.

Talk to the lender

Your lender can actually be a great resource to helping improve your cosigning situation. You can ask the lender to only hold you as a cosigner for the principle on the car, not any interest or fees.

Be sure to ask the lender to contact you via phone or mail if the main borrower misses a payment. Often times, a borrower is too embarrassed to tell their cosigner that they cannot make a payment, and the cosigner only finds out when it’s too late.


Final Note

If you have no credit history or have a less than perfect credit score, you and a cosigner can both benefit from a cosigning arrangement. By cosigning for somebody, you can help out a family member or friend save thousands of dollars during the term of their loan.

Cosigning for somebody and asking somebody to cosign for you is filled with risk. If it all goes well, however, the borrower will be in a new car and the cosigners credit score may have increased. Before you sign on the dotted line, make sure you know and understand the dangers of cosigning.

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!