Business

How Does Cosigning A Car Loan Work?

Jai Bhatt

Car loans are the fastest and easiest way to buy a car. However, for people who have bad credit or have no credit history, it becomes hard for them to get their first car loan or a refinance auto loan.

Therefore, the best option is getting a co-signer, especially one with good credit, which increases the chances of hitting the car loan approved. It also makes it cheaper and easier to buy a car.

While this is a common concept, people new to the car loan environment might not fully understand how co-signing a loan works.

How Co-Signing For An Auto Loan Works

Just like the primary buyer, co-signers accept full responsibility for paying back the loan, but the primary borrower is the one who has the responsibility to repay.

However, the loan debt will also appear on the co-signer’s credit history. That means that if the primary borrower does not pay back, it could damage not only their credit history but also that of the co-signer.

Therefore, if the primary borrower fails to pay the loan, the co-signer should make the monthly payments.

However, if the primary borrower makes their payments on time, it will not only help build up their credit score but also that of the co-signer.

How much a co-signer helps on the auto loan

Co-signing for an auto loan makes it more affordable and easier for the primary borrower to get the car. Equifax, the credit bureau, says that having a co-signer who has a good credit score makes it easier to get approved for a car loan.

It also makes the interest rates more affordable. That is because a co-signer who has a good credit score means less risk for the lender.

What you should know before co-signing a loan

Before becoming a co-signer for a car loan, people should consider whether it is the best financial move for them. Some of the things people should consider before co-signing a loan include;

  • How well they know the person
  • Whether the primary borrowers have a secure job
  • How much they trust the primary borrower
  • Their ability to make monthly payments in case the primary borrower defaults.
  • The primary borrower’s spending and credit history
  • Their level of commitment in tracking the loan

The co-signer also needs to understand the qualifications they should meet to become a co-signer. One of the main ones is having a steady and secure job, which proves their ability to pay the loan in case the primary borrower does not pay.

They should also have a good credit history to increase the chances of getting the loan approved and show proof of their permanent residence.

Pros and cons of co-signing for a car loan

Pros

  • Parents could help their children get their car and also build their credit score by co-signing and paying for the loan.
  • As long as the primary borrower pays the loan n time, it helps build the co-signer’s credit history and credit score.

Cons

  • Reduces the co-signer’s borrowing power because lenders consider their current debts.
  • Could damage the co-signer’s credit score and credit history if the primary borrower does not pay.

Whether people want to get a loan to buy a car or a refinance auto loan, they need to get the best loans with the best payment terms and interest rates. For that, they can use trusted platforms like Lantern by SoFi to compare rates well in advance.