Pros and cons of having a co-signer for a car loan

A co-signer for a car loan agrees to back your loan without having a claim to the car you buy. You still own the vehicle and make payments to the lender. Your co-signer is a backup if you aren’t able to repay your loan.

The co-signer takes on a share of the financial responsibility to improve your approval odds. But it’s a big responsibility — and not all lenders offer this option. If you can add a co-signer to your loan, be sure everyone knows the risks before agreeing to borrow.

Pros and cons of having a co-signer

There are a lot of benefits to having a co-signer if you have bad credit or a low income. However, your co-signer has responsibilities and risks. Be sure they are aware of the drawbacks when you apply together.

When to have a co-signer for a car

A co-signer may increase your chance of approval, give you access to better loan terms and — over time — help you improve your credit score. It’s worth opting for a co-signer if you have multiple debts, low income or poor credit.

You have a low credit score or limited credit history

A co-signer adds to your application if you don’t have an extensive credit history or have a poor credit score. Lenders will see that someone else is guaranteeing your loan and will be more likely to approve you to borrow.

A car loan backed by a co-signer will also help grow your credit history. Your credit score will naturally increase as you make on-time payments.

Your debt-to-income (DTI) ratio is high

On top of minimum income and credit requirements, lenders typically want to see a low debt-to-income ratio. If your DTI is high but you have a co-signer with a low DTI, you may increase your odds of approval.

A lender is unlikely to consider your co-signer’s income, however. While their credit score and DTI play a role in approval, you must be able to make payments on your own to qualify. After all, your co-signer isn’t responsible for the loan unless you cannot pay.

You only qualify for high interest rates

Lenders may look at the credit score of both you and your co-signer. So, a co-signer with good credit — a score above 660 — may result in lower rates.

The average auto loan rate for subprime borrowers on a new car is 12.28 percent. It gets higher for used cars. Because of this, a co-signer with good credit may push you toward a lower interest rate. And that could save you hundreds of dollars over your repayment term.

You have been rejected by lenders for a new loan

If you struggle to get approved, applying with a co-signer may bolster your application. It isn’t a guarantee, but improving your odds doesn’t hurt. Neither does waiting until you improve your credit to apply again.

When not to have a co-signer for a car

Using a co-signer to get an auto loan approved is a step that should be considered carefully before applying. Sometimes, it may not be a wise move for your needs and financial situation.

Although a co-signer takes on risks when you borrow, you’ll still face the biggest financial repercussions if you can’t repay your loan.

The car isn’t in your budget

If you could not afford your desired car, even with a lower interest rate, it’s best to hold off. Consider saving for a bigger down payment. That will offset the amount you must borrow, so your monthly payment aligns with your income and budget.

Also, work to improve your credit score, which should help you get a better interest rate and more affordable loan payments on your own.

If you can’t wait to get a vehicle, look for a used car at a lower price point. Used cars are typically less expensive, although interest rates on used auto loans tend to be higher. You can get similar features as new cars without breaking the bank, even if you still need a co-signer to qualify.

You should always determine how much you can afford to spend before applying for loans or shopping for cars.

You expect conflict with your co-signer

A co-signer takes on significant risk when they agree to back your loan. Your co-signer’s credit score will suffer if you get behind on payments or default. Their other finances may, too, if the lender pursues legal action. Of course, this may strain your relationship, potentially beyond repair.

Conflict could also arise if your relationship with your co-signer sours for reasons other than the loan.

If things get tight, look into how to remove a co-signer from your loan.

You don’t meet the income requirements

The lender will only consider your income when determining whether you meet the requirements. Your co-signer’s income will not factor into this part of the application. So, a co-signer with bad credit but good income won’t help with approval or better rates.

However, a co-signer must prove they have enough income to make the monthly car loan payments should you default. The primary point to understand as a potential car buyer is that a co-signer can’t help if you need more income to qualify for a loan.

Your co-signer isn’t willing to take on the risks

A co-signer has to agree to be part of your loan. Make them aware of the risks so they can decide if they are willing to be part of your auto loan.

These risks and responsibilities include:

• Paying off the loan. A co-signer has equal legal responsibility for paying off the loan without having full ownership of the vehicle. This differs from co-borrowing, where both parties hold ownership.
• Making missed payments. If you miss a payment, your co-signer will be held responsible and must step in and make the payments. Otherwise, you may default, damaging both of your credit profiles.
• Miscellaneous fees. Along with making missed payments, a co-signer is also on the hook for any late fees and the cost of repossessing the vehicle after default.

The bottom line

Having a co-signer on your auto loan application can make the approval process easier. You may land more favorable loan terms and more affordable monthly payments. A co-signer can be particularly helpful if you’re just beginning to build a credit profile or if your credit score needs improvement.

But assess whether using someone as a co-signer will lead to conflict or if the car is even in your budget. And before using a co-signer, consider your other options. Saving a larger down payment can make the car purchase more affordable for your budget. So can improving your credit score to earn a more competitive auto loan interest rate.