Whether you’re starting a new job, heading off to college or moving from the city to the suburbs, you’ll probably need a car to get around. But if you have poor credit or are just starting out and have yet to establish credit, you may have trouble meeting the requirements to qualify for auto financing on your own.
How does a co-signer work?
Fortunately, there’s an alternative. By asking a friend or family member to act as a co-signer for a car, you can leverage their good credit to increase your chances of qualifying for a car loan. It’s an option with several advantages as well as a few caveats. Knowing the terms of such an arrangement will make for a happier partnership between you and your co-signer.
Using a co-signer is a guarantee to the lender you’ll be able to meet your monthly financial obligations, with on-time and in-full payments. If for some reason you can’t, the co-signer promises to make payments on your behalf. Of course, co-signers will need to have good to excellent credit and provide evidence of their ability to repay the loan, such as employment income or assets.
Get a better interest rate
Besides securing an actual loan, there is one big advantage to using a co-signer: better interest rates. A co-signer with good credit will improve the loan terms a lender would otherwise offer a credit-challenged driver. Better rates may help ease the monthly payment obligation for the driver, which can be important for students or young workers on a tight budget.
Build Credit and Habits
For drivers with poor or nonexistent credit, using a co-signer allows them the time to build up a solid credit history. Showing a lender a track record of prompt payments over several years is important when applying for credit cards, buying a home, or securing a loan to start a small business.
Having a financially experienced co-signer can prove an invaluable partnership for an inexperienced or credit-poor borrower. Such a friend or family member can mentor the driver on budgeting and the importance of following through on payments in a timely manner, while reminding them of schedules and due dates.
The co-signer can act as a buffer between the driver and lender, heading off potentially negative issues before they might arise. They can also act as an adviser when negotiating the purchase of a car or securing a loan through a bank.
Things to consider before becoming or asking someone to be a co-signer
Before asking someone to be an auto loan co-signer, or before agreeing to co-sign for a friend or family member, there are issues to consider in such an arrangement. For instance, if the borrower suddenly runs into financial hardship and can’t pay the loan, it puts the co-signer on the hook for the debt and can potentially hurt his or her credit.
What’s more, a co-signer can’t be removed from the loan agreement unless the driver refinances, or sells the car and uses the proceeds to pay off the loan.
Another often-overlooked issue concerns the car itself.
Depending on the arrangement, co-signers may hold title to the vehicle or be legally attached to it in some form. In the event of an accident, insurers may hold the co-signer accountable for claims, even when they’ve never driven the car. It’s important to consider such issues because negative consequences can put a strain on a friendship or family relationship.
Do you have your co-signer lined up and ready to go? Drivers and their co-signers can calculate what they can afford and see the current loan rates at Nationwide Bank.