If you’re just embarking upon adulthood and have a limited credit history, or you just have less-than-perfect credit, getting a car can be a complicated process. Unless you can pay for your vehicle with cash or are gifted one, you’ll need to find a way to finance your new ride.

Most people finance their vehicles by taking out a loan. The person who purchases the vehicle (the borrower) agrees to pay back the loan, plus interest, over a set period of time. Lenders usually have strict requirements when it comes to loan approval, such as proof of income and a good credit score.

But what happens when you need a new car but have a low credit score? What if you are between jobs or the loan you were approved for has a steep interest rate? You may be able to get approval for a loan (and a lower interest rate) by applying with a cosigner.

A car loan is a serious commitment, and there are several things you should consider before you ask a friend or family member to cosign your loan.

Why Do Lenders Allow a Loan Cosigner?

Lenders allow a loan cosigner to help the borrower qualify for a loan. When a person cosigns a loan, they agree to take on the responsibility of repaying the loan if the borrower fails to do so. This provides additional assurance to the lender that the loan will be repaid.

Reasons Why Car Buyers Might Look for a Cosigner

• Poor credit history: A low credit score indicates the borrower has had difficulty managing their finances in the past and may be considered a higher risk for lenders.

• Lack of income: If someone does not earn enough money to qualify for a loan on their own, they may need a cosigner to help them get approved.

• Age: Young individuals with a limited credit history may not qualify for a loan unless someone can cosign it.

• Self-employed: If the borrower is self-employed and does not have steady income, the lender will want to ensure they’ll be able to make monthly payments.

• Too much debt: People who’ve accumulated a lot of debt in relation to their income may not have enough money to repay their loan.

Who Can Cosign a Loan?

Borrowers will typically ask a close friend or family member to cosign their car loan. However, not every family member or friend may qualify as a cosigner.

From a lender’s perspective, a cosigner must show they’ll be able to make monthly payments in case the borrower defaults on the loan. 

Although requirements vary depending on the lender, generally, a cosigner must:

• Be at least 18 years old.
• Have a good credit score and credit history.
• Have steady income.
• Be a U.S. citizen or permanent resident with valid documentation.
• Be willing to take on the responsibility of repaying the loan if the primary borrower defaults on it.

Pros and Cons of Purchasing a Car with a Cosigner

A cosigner may be an excellent idea if you need help financing your car. However, it’s important to understand the pros and cons of purchasing a vehicle with a cosigner so you can make an informed decision.

Pros:

Lower interest rates: Interest rates scale up and down based largely on the perceived riskiness of a borrower. Having a cosigner on your car loan can help you get lower interest rates, as lenders will know that someone else is responsible for the debt if you fail to pay, greatly reducing their risk.

Easier approval: Having a cosigner can make it easier to get approved for a car loan. This can be especially helpful if you have bad credit or no credit history, since it gives lenders more assurance that they’ll get their money back.

Opportunity to build credit: If you make all your payments on time and in full, a car loan can help you build your credit score over time. Your payments will be reported to credit bureaus and will show up on your credit report, which can help improve your score over time. Having a cosigner may enable you to qualify for a loan and enjoy the credit-enhancing benefits of consistent on-time payments.

Cons:

Taking out a loan you cannot afford: Having a cosigner with good credit and steady income may mean you’ll get approved for a loan you won’t be able to afford. Before you sign off on a loan, make sure you can afford the monthly payments.

Your credit and your cosigner’s credit can plummet: If you miss payments or default on your loan, not only will your credit suffer but your cosigner’s credit will suffer as well.

You risk conflict in your personal relationship: If you cannot afford your payments, your cosigner will be asked to step in and repay your loan, which may create conflict and put a strain on your personal relationship.

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