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If you have a limited credit history or low credit score, you might have a tough time qualifying for a car loan. Or, if you do qualify, the loan may come with a steep interest rate that drives up your monthly payment amount and the total cost of the loan. However, you may be able to get your loan—and a better interest rate—by applying with a cosigner.
A cosigner agrees to share responsibility for paying back the loan, using their good credit history to reduce the loan's risk in the eyes of the lender. Adding a cosigner can be a great way to qualify for a loan that wouldn't be available to you otherwise, but it's not something to be done lightly. Before you ask someone to cosign a loan, make sure you both understand what the agreement means, and what the potential consequences could be.
What Is a Cosigner?
A cosigner applies for a loan with you, allowing lenders to use their credit history and other financial details as part of their decision process. They take on joint responsibility for your loan, are listed with you on any financing agreement, and are obligated to make payments if you can't.
Your cosigner will likely need a credit score of 670 or above, along with sufficient income, to qualify. Lenders use the cosigner's income to calculate their debt-to-income ratio, which determines whether they can afford the monthly car payments. Even if you plan to pay the loan without ever asking your cosigner for assistance, the lender wants to make sure that the person who is guaranteeing the agreement is really in a position to do that.
Is a Cosigner Always an Option?
Not all lenders will give you the option of having a cosigner, but many offer it as a way to make financing viable for more borrowers. You can be denied a loan for a number of reasons, including your credit score and history, as well as your income and other factors.
If you're fresh out of college and just started your first job, your salary may be relatively low, especially when lenders factor in any other debts (including student loans) you might be carrying. A cosigner can help you meet approval requirements and not only buy a car, but build your own credit history as well.
If you think you'll need someone to cosign a loan with you, it's wise to call around to a few dealerships, banks and auto lenders to find out if they allow cosigners. That way, you can focus your search and loan application processes on lenders you know will work with you and your cosigner.
Pros and Cons of Buying a Car With a Cosigner
A cosigner can help you get financing for a new car, but it's a big decision and it's not right for everyone. Consider the following pros and cons as you weigh your car-buying options:
- You may improve your chances of approval. If lenders see you as a high-risk borrower on your own, whether that's due to your credit, existing debt, income or other factors, a cosigner can lower the risk by vouching for you and promising to make sure the loan is repaid.
- You could get a better interest rate. Your credit score influences the interest rate you receive on a car loan. If your score is low, a cosigner's good credit could help you qualify for a lower rate, which means lower monthly payments.
- You'll have the opportunity to build credit. When you apply for financing with a cosigner, you are the primary borrower. The loan will appear on your credit report, and as long as you make your payments on time, it will help you build a strong credit history and increase your score. The loan will also appear on your cosigner's credit report, which can help their credit as well.
- It might help you get a better car. Without a cosigner, your options may be limited. If you do qualify for a loan, it may be at a lower amount and higher interest rate than you'd need to purchase the car of your choice. Or, you might have to pay cash for an older model used car if financing isn't an option. A cosigner can help you get the loan you need to buy a solid, reliable car you can use for all your essential needs while you build your credit and save for your next vehicle.
- You could wind up with a loan you can't afford. Before you agree to take on the loan, be sure you can afford the monthly payments. If the payments will push your budget to its limit, borrow less and leave yourself more breathing room month to month.
- Your credit (as well as your cosigner's) could suffer. Any missed car payments will have a big negative impact on your credit and your cosigner's. If you default on the car loan and the car is repossessed, that will do further harm. Credit score harm that results from cosigning a loan can make it more difficult for your cosigner to obtain financing for their own needs. Another thing to consider: The loan's appearance on the cosigner's credit report will increase their debt-to-income ratio, which could complicate borrowing for them.
- A cosigned loan can complicate the personal relationship. Taking out a loan with someone is a big commitment. The loan can easily cause conflict in your relationship if you can't afford your payments and your cosigner has to cover them for you, or if their credit score drops because of the loan. Talk through all of the details and how you'd handle any payment issues before signing the loan so you know when and how to communicate about any problems that might arise.
The Cosigning Process
The first step in the cosigning process is choosing someone to be your cosigner. You'll want to ask someone you trust and who has good money management habits. Since your cosigner should have a relatively high credit score, think about who you know that is responsible with their finances. For instance, if you know your best friend makes a habit of carrying little to no debt and paying their bills on time, they might be a good candidate.
Of course, cosigning a loan is a big ask, and even someone who is close to you may be reluctant to agree. Before you approach them, gather all of the information you can about the lender, the loan and the type of vehicle you want to buy. Showing that you've already put a lot of thought into the process may reassure them that you're committed to making your payments on time and protecting both your credit scores.
Again, it's a good idea to talk through any concerns they have, as well as how you'd handle any worst-case scenarios. Do you have a few months of payments in savings already in case you lose your job or can't work for a period of time? Is your cosigner willing and able to make payments on your behalf if needed to help you avoid default? Having a game plan will help you deal quickly with any emergencies and avoid any negative outcomes for either of you.
Once you're ready to apply, your cosigner will need to authorize a credit check and provide other information to the lender as well. If you are applying over the phone, they may need to get on the line with you. For in-person applications, they may need to be present as well.
How to Raise Your Credit Score for Future Car Loans
In an ideal scenario, you'd be able to qualify for an auto loan without a cosigner. But asking a trusted relative or friend to vouch for you can help you purchase a vehicle you need to get to work, which will allow you to steadily build your credit profile and grow your income—two major factors in ultimately qualifying for financing on your own.
There are other ways to build your credit as well, including:
- Paying down other debts, such as credit cards or personal loans
- Taking care of any past-due accounts and charge-offs
- Making sure all bills are paid on time
- Limiting the number of new credit cards and loans you open
Saving up for a down payment on a car can also help you qualify, and it reduces the size of the loan you'll need and the total amount of interest you'll pay. You can set a savings goal for a new car each month so that you'll have a sizable down payment by the time you're ready to buy another car. The bigger your down payment, the smaller your loan will be, which has numerous benefits, including a lower monthly payment.
As you prepare to apply for a car loan, it's important to make sure you understand what's in your credit file. Visit AnnualCreditReport.com to get a free copy of your credit report from all three credit bureaus (Experian, TransUnion and Equifax). You can sign up to view your credit score for free through Experian as well. Experian also offers free credit monitoring, which alerts you anytime your credit score or account balances change. This gives you insight into your credit at all times, giving you more control as you focus on raising your score.
If you feel your credit score needs a lift, consider signing up for Experian Boost®ø, which can help raise the credit scores based on your Experian credit report instantly by including bill payment history for your utility, cellphone and streaming accounts.