Pros and cons of having a co-signer on a car loan
Quick insights
- A co-signer is someone who agrees to be added to a loan and takes financial responsibility for payments in the event that the original borrower does not make them.
- You may consider adding a co-signer to a car loan for a few reasons, such as improving your chances of approval if you have a low credit score.
- When adding a co-signer to a car loan, it can be helpful to have clear communication with the co-signer and an understanding of the terms before finalizing the loan.
Not everyone is able to make a big purchase like a car entirely on their own, even with a loan. If you are someone who has a lower credit score, can’t afford monthly installments or want to increase your chances of getting approved, you might want to think about adding a co-signer to your car loan.
What is a co-signer?
A co-signer is someone who is added to a loan and is responsible for making payments should the original borrower be unable to. Co-signers are often added to loans, leases and other contracts where the borrower may not have the means to make payments (for example, having insufficient income) or they have a poor credit score/credit history.
Pros and cons of having a co-signer
When it comes to a car loan, a co-signer may be a helpful addition for those who want to get approved and potentially get better terms on their loan. Let’s explore some of the pros and cons of having a co-signer on a car loan.
Pros
- Possible increased potential for getting approved for a loan
- The possibility of better loan terms, which could potentially lower your monthly payment or give you a better repayment timeline
- Potential for lower interest rate, which could potentially save your money
Cons
- Increased risk to the co-signer's credit
- Potential financial strain should the co-signer need to make payments, such as if the borrower defaults on the loan
- Potential for personal strain between borrower and co-signer
When to have a co-signer for a car
If you are getting your first car and don’t have sufficient credit history, having a co-signer (such as a parent or guardian) may be beneficial. This can help with getting approved for a loan along with the potential for better rates and terms. It may allow you to get your foot in the door to begin building your credit while having a financially responsible person at your side.
Another time when having a co-signer may be beneficial is if you have a low credit score. Because credit scores are taken into account when determining your chances of approval, loan terms and interest rates, you may find that with a low credit score, it’s harder to get approved or get more favorable terms. With a co-signer, you could help your chances of getting lower interest rates than if you applied without one. Of course, it’s helpful if your co-signer has a healthy credit score and can demonstrate the ability to make loan installments.
When not to have a co-signer for a car
Even if it’s your first time buying a car or taking out a loan, it’s possible you have a decent enough credit score and sufficient income to be able to get approved for an auto loan without a co-signer. For instance, should you have the means, you could put more money down towards your initial deposit to help offset some of the cost in interest.
It may be helpful to come up with a budgeting plan to see what you can afford in monthly installments and use your debt-to-income ratio (DTI) as a guide.
These are some possible reasons why it may not make sense to have a co-signer on your auto loan:
- You have a high enough credit score that could qualify you for a loan
- You are able to put down a larger down payment so that you can get approved for more favorable loan terms
- You feel comfortable with your DTI and ability to make your payments on time
Applying for a car loan with a co-signer
Below are some steps you can take to help you apply for a car loan with a co-signer:
1. Discuss the decision with your potential co-signer
Once you’ve identified a trusted friend, family member or loved one, discuss the decision about adding them as a co-signer. You cannot successfully complete an application with a co-signer if you and the co-signer are not on the same page. Make sure they are aware of the responsibilities and risks involved, such as the potential impact on their credit score and their liability if you are unable to make your payments.
2. Check your credit score
Knowing your credit score ahead of time can be helpful to prepare you for what kind of interest rates and loan terms you might get. One way to check your score is by enrolling in Chase Credit Journey®, a free online tool anyone can use.
3. Gather necessary paperwork
To help make for a smoother process, you and your co-signer may want to prepare by having the following documents on hand already:
- Proof of income
- Proof of residence
- Identification
4. Do some research
To help you stay informed, do some initial research and compare loan terms among lenders such as banks and credit unions. You may also consider applying for a loan when you are in the buying stages at the auto dealership.
5. Apply for the loan and finalize the terms
Once you've chosen a lender, complete the loan application with your co-signer using the documentation you’ve gathered. Make sure you carefully review the loan terms and understand the agreement with your co-signer. Once you and your co-signer agree to the terms, you can then finalize the loan.
Remember, it's important to keep your co-signer informed throughout this process, as they're taking on a significant financial responsibility by agreeing to co-sign your loan.
Alternatives to co-signing an auto loan
In the event that you don’t want or don’t have a co-signer, you may want to consider some alternatives. These include:
- Saving up for a larger down payment, as this can help lower your costs in interest.
- Researching cars that are more affordable and within your price range.
- Consider leasing a car if it is financially beneficial to you.
- If you have a low credit score or lack credit history, work towards improving this, such as by making regular payments on existing lines of credit.
In conclusion
Buying a car is a big decision, and so is the choice of having another person financially involved. Adding a co-signer to a car loan may be beneficial to you, but it’s important to make sure you and your co-signer are on the same page before finalizing an agreement. Clear communication and understanding the terms can help make adding a co-signer a smoother process.
