If your income is limited or your credit needs improvement, getting a car loan with affordable monthly payments can be difficult. However, having a co-signer on your loan can make a significant difference.
If you have a co-signer, that person’s income and credit profile will be taken into account and the loan terms offered to you are likely to be much more favorable. In some cases, a co-signer can even mean the difference between loan approval or rejection.
How a co-signer helps in completing 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 that are offered 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 verify, as well as applicants whose Credit score is far from ideal. If you have a co-signer, that person’s income and credit will also be considered as part of the application.
In short, a potential lender will assess your co-signer’s ability to fully repay the loan themselves. If your co-signer has a good credit score of 670 or higher and an income higher than your own, you should be eligible for better credit terms. This is because a co-signer gives the lender additional assurance that the loan will be repaid even if you are unable to make payments.
Co-signers and Minimum Income Requirements
Lenders typically have minimum income requirements for loan approval. As the lead applicant, the lender will only consider your income when determining whether you meet these requirements. Your co-signer’s income is not taken into account in this part of the application – your co-signer’s income will not be added to yours to help you meet the minimum income threshold.
However, a co-signer must be able to demonstrate that they have sufficient income to pay the monthly car loan installments should you default on payments for any reason. The most important point for you as a prospective car buyer to understand is that if you need more income to qualify for a loan, a co-signer probably isn’t the solution.
Co-signing vs. co-borrowing
There is a key difference between a co-signer of your loan and a co-borrower, sometimes referred to as a co-applicant. It is important that you understand how these two approaches to buying a vehicle differ.
If you have a co-signer, that person does not own the vehicle. You simply agree to step in and make car payments if you are unable to.
A co-borrower, on the other hand, is someone who shares ownership of the car. From the moment the loan is approved, the co-borrower is as responsible for the payments as you are. In addition, when taking out a loan with a co-borrower, any assets used to guarantee the loan, such as B. a house or a car, must be owned by both co-borrowers.
When not to have a co-signer on a car loan
Using a co-signer to approve a car loan is a step that should be carefully considered before applying. In some cases, this may not be a wise move for your needs and financial situation.
The car is not in your budget
If the car just isn’t in your budget, even with a lower interest rate, it’s best not to buy a car at all. You may want to wait until you can save more money for a larger down payment before buying a car so that the loan amount is more in line with your income and monthly budget. The other option is look for a used car at a lower price if you need a vehicle sooner rather than later.
You may also want to see if your credit score can be improved, which should help you get a better interest rate and loan payments yourself.
Your relationship might be strained
Having a co-signer on a car loan can be a slippery slope when problems arise in your relationship. It can also strain the relationship if you default on loan payments and your co-signer is asked to bail you out financially.
The final result
Having a co-signer to help you with a car loan application can simplify the approval process. In many cases, you get better credit terms, which can make the car cheaper for you every month. This can be especially helpful if you are just starting out on a credit profile or if your credit score needs improvement.
However, before you use a co-signer to proceed with a loan application, consider your options, including making a larger down payment to make buying a car more affordable for your budget, or improving your credit score so you can earn more competitive interest rate.