If your income is limited or your credit score needs improvement, it may be difficult to get a car loan with affordable monthly payments. However, having a co-signer on your loan can make a significant difference.
When you have a co-signer, that person’s income and credit profile are taken into account, and the loan terms you are offered are likely to be much more favorable. In some cases, having a co-signer can even be the difference between getting loan approval or being rejected.
How a co-signer helps when taking out a car loan
Using a co-signer to apply for a car loan can give your application a big boost and ultimately improve the loan terms available to you. This is especially true for those who are just starting to build their credit profile and have a limited repayment record for lenders to review, as well as for applicants whose credit rating is less than ideal. When you have a co-signer, that person’s income and credit history are also considered as part of the application.
In short, a potential lender will consider your co-signer’s ability to repay the loan entirely on their own. If your co-signer has a good credit score of 670 or higher and an income higher than yours, you should 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 cannot make payments.
Co-signers and minimum income requirements
Lenders usually have minimum income requirements for loan approval. As the principal applicant, the lender will only consider your income to determine if you meet these requirements. Your co-signer’s income will not be considered in this part of the application – your co-signer’s income is not added to yours in order to help you meet the minimum income threshold.
However, a co-signer must be able to prove that they themselves have sufficient income to make the monthly car loan payments, should they default for any reason. The main point to understand as a potential car buyer is that if you need more income to qualify for a loan, a co-signer probably isn’t the way to go.
Co-signing vs. co-borrowing
There is a significant difference between having a co-signer on your loan and having a co-borrower, sometimes also called a co-applicant. It is important that you understand how these two approaches to buying a vehicle vary.
When you have a co-signer, that person does not own the vehicle. They just agree to step in and make car payments if you can’t.
A co-borrower, on the other hand, is someone who shares ownership of the car. From the moment the loan is initiated, the co-borrower is just as responsible as you for the payments. Additionally, when taking out a loan with a co-borrower, any assets used to secure the loan, such as a house or car, may belong to both co-borrowers.
When not to have a co-signer on a car loan
Using a co-signer to get approved for a car loan is a step that should be carefully considered before applying. In some cases, this may not be a wise decision given your needs and financial situation.
The car is not in your budget
If the car just doesn’t fit your budget, even with a lower interest rate, it’s best to forego buying the car altogether. You may want to delay buying the car until you can save more money for a bigger down payment, so that the loan amount is more in line with your monthly income and 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 check if your credit score can be improved, which should help you get yourself a better interest rate and more affordable loan repayments.
Your relationship could be strained
Having a co-signer on a car loan can be a slippery slope if something goes wrong in your relationship. It can also add strain to the relationship if you fall behind on loan repayments and your co-signer is called upon to bail you out financially.
The bottom line
Having a co-signer to help you with an auto loan application can make the approval process easier. In many cases, you’ll end up with more favorable loan terms, which can make the car more affordable for you each month. This can be especially useful if you are someone who is just starting to build a credit profile or if your credit score needs to be improved.
Before using a co-signer to proceed with a loan application, consider your options, including saving a larger down payment to make buying the car more affordable for your budget or improving your credit score so you can earn more. silver. competitive interest rate.