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A co-signer agrees to act as a guarantor for another person's loan. For example, if your child wants to buy a car but lacks sufficient credit history, you can help them by co-signing on their loan.
In the event that they miss a payment or default on the loan, you're legally responsible for covering the outstanding costs. However, if they stick to the agreement, you won't be responsible for paying anything. Your role is simply to strengthen the loan application, helping them to get better borrowing terms.
Co-signers shouldn't be confused with co-borrowers. It's possible to make a joint loan application, which is often a popular choice for couples. In this scenario, the loan is intended to be used by both borrowers for a purpose such as buying a car or home. However, a co-signer doesn't benefit from the loan. They're merely a guarantor listed on the application form, with no stake in the vehicle being purchased.
Why Would You Need a Co-Signer for a Car Loan?
The most common reason you may need a co-signer is that your credit score doesn't allow you to borrow alone. Typically, you need to have a score of at least 600 to secure a standard auto loan. However, there are exceptions to this rule, such as loan programs designed specifically for people with poorer credit.
Even if you can get a loan with your own credit score, a co-signer can still be useful. If your credit score is poor, you can generally only access higher interest-rate loans and may be extremely limited on how much you can borrow. Adding a co-signer can unlock lower rates and more flexible terms, reducing the overall cost of your purchase. This is because the lender can have more confidence that it'll recover the loan and interest in full if someone with a stronger credit score is backing up your application.
You may also look for a co-signer if you have a high debt-to-income ratio. Working in a low-paid profession or having no savings to make a down payment can make the auto loan appear risky when the lender compares the sum with your annual income. In this scenario, the backing offered by a co-signer's income can persuade a lender to approve the agreement.
Benefits of Co-Signing a Car Loan
One of the main benefits of co-signing a car loan is the opportunity to help the borrower purchase their desired car. A co-signer is usually a close friend or relative, as it's a big commitment to make. By agreeing to co-sign, you're showing you care seriously about the needs of the person looking for a loan.
Your main benefit as a borrower is securing a lower interest rate or the ability to borrow more than you could alone. What's more, if you have poor credit, you get the opportunity to rebuild your credit score by making regular repayments on your loan. This may help you borrow independently in the future without needing a co-signer.
Risks of Co-Signing a Car Loan
There are risks that you should consider carefully before proceeding with a co-signed loan. Whether you're a potential borrower or co-signer, you should be aware that a co-signed loan could significantly strain your relationship with the other person. The co-signer will legally be responsible for the debt if the borrower misses a payment. In addition, missed payments can have an impact on both people's credit scores. If this is a risk you're prepared to accept, you may be able to manage your relationship without too much friction.
Another potential problem is that the co-signer may face penalties if the primary borrower fails to make payments. As we've already noted, the co-signer is legally responsible for the debt in the event the borrower can't repay. This means that debt-collecting tactics can be used on both parties.
There is no right or wrong answer for every situation. For some people, co-signing an auto loan could well be the best option. For others, it may be advisable to avoid doing so. The key is discussing the process thoroughly so that everyone involved is clear on what they're signing up for.
Contact Easterns Automotive Group Today for Help Accessing a Car Loan in D.C.
Co-signing a loan is an option that's well worth considering if you're searching for the best loan deal on your next purchase. Our Maryland finance professionals here at Easterns Automotive can advise you on whether co-signing is right for you and discuss other loan options that may be available. Contact us today, or fill out our online application form to get the financing process started. Whether you're looking to purchase a truck, SUV, or sedan, we're on hand to provide you with the funds required to conclude the deal hassle-free.