When Do You Need a Cosigner for a Car Loan?
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Buying a car, especially for the first time, is one of those milestone moments in life. But depending on your financial circumstances, you might consider asking a family member or close friend to be a cosigner on your loan. If you’re wondering, what exactly is cosigning and why do I need a cosigner for a car—you’re in the right place.
In this blog, we’ll explain the mechanics of auto financing, what getting a cosigner means, and when you need a cosigner for a car. We’re including a table of contents below so that you can jump to whichever topic is most relevant to you.
What Is a Car Loan?
The vast majority of Americans cannot afford to pay for a car in full at the time of purchase. This is where auto financing—also referred to as taking out an auto loan—comes in. Essentially, you are borrowing money from a bank, credit union, or dealership to pay for the vehicle.
But before you apply for a loan, there are some key steps to take that can make the process smoother.
Check Your Overall Credit
For a lender to loan you such a significant amount of money, you’ll need to show that you’re “creditworthy,” meaning you’ve got what it takes to repay the loan on time and in full.
To that end, you’ll need to show:
A good credit score that indicates you have handled debt responsibly in the past
A steady and reliable income
A willingness to contribute some of your own money as a down payment
You can check your credit report for free here. Make sure your information and payment history is correct and up to date. Also, pay off or pay down any outstanding bills or debt before applying for a loan. All of these steps will help to improve your credit score.
Get Pre-Approved
The combination of credit history, income, and cash you bring to the table, plus the amount of money you need to borrow, will determine the type of loan you get. Look for lenders who offer:
Low interest or annual percentage rates (APRs)
A reasonable payment term length (not too long)
An affordable down payment
Shop around with several lenders and ask for quotes for the amount you want to borrow. This will give you an indication of the size of the monthly payments you’ll be making and how long you’ll be making them. You can crunch the numbers in an auto loan calculator.
Choose the most affordable option and request pre-approval for a loan. This is a preliminary offer of financing which includes the principal, interest rate, and term length which you can then take to the car dealership.
What Is a Cosigner?
Think of a cosigner as a financial safety net. This is a person with excellent credit and a steady income who legally agrees to cover your loan payments if you cannot. With a cosigner, you have a better chance of getting approved for a loan.
A cosigner is backing your loan, meaning they use their stronger credit history to underwrite or guarantee yours.
Cosigners are usually required to have:
Excellent credit—often with a credit score above 700
A good debt-to-income ratio
A steady income
Keep in mind, however, that a cosigner is not a co-owner of the car and does not make regular payments on your behalf. In emergencies when you cannot make your monthly payment, the cosigner steps in and saves the day.
Cosigning a loan is a big commitment because a cosigner is financially liable for making sure your loan is paid on time every month for the length of the loan term.
When Do I Need a Cosigner for a Car Loan?
You might consider asking someone to cosign if you’ve struggled to qualify for pre-approval based on your:
Poor credit or lack of credit history
Lack of employment or a lower income
A high debt-to-income (DTI) ratio: you’re carrying too much debt for the amount of income you have
Inability to put a decent amount of money down upfront
You might also want to consider a cosigner if you are given quotes that include:
Monthly payments amount that you might have difficulty paying
A loan term longer than three years
Very high interest rates
In general, most lenders look for a certain credit score to offer loans without cosigners. Additionally, if you’re 18 years old, it’s possible to get a loan without a cosigner. However, if you’re that young, you likely don’t have much of a credit history, so lenders won’t know if you’re responsible when repaying your debts.
Therefore, you’ll have a better chance of getting a loan if you have a cosigner to back you up.
Why Do I Need a Cosigner for a Car?
Adding a cosigner is sometimes the only way to qualify for a loan if your credit is non-existent or poor. A cosigner can also help you from getting in over your head with an auto loan.
For many families, this is also a good way for teenagers or young adults to share the responsibility of a new vehicle and get used to managing household debt.
Closing the Deal
A qualified cosigner allows you to get pre-approved for a loan with affordable payments and a reasonable term. Once you are pre-approved, you can negotiate the final sale price of the vehicle with the dealership.
The APR and monthly payment might differ a little from your pre-approval details and will likely include some additional fees, but the down payment and term should remain the same.
Your cosigned loan should allow you to get the keys to the vehicle of your dreams while maintaining affordable payments on your new ride!
When Do You Need a Cosigner for a Car: The Credit Union Difference
Unlike banks, which are driven by producing profits for their shareholders, credit unions like Listerhill are member-owned financial cooperatives that prioritize people over profit.
So if you’re in the market for a car, but can’t get a loan without a cosigner, credit unions can offer lower interest rates on auto loans than commercial banks because of our not-for-profit status and lower overhead costs.
As a local credit union serving folks in Alabama, Georgia, Mississippi, Florida, and Tennessee, Listerhill offers auto loans with lower rates, fewer fees, and more flexible payback options to get your wheels spinning!
Click below to learn more about getting approved for an auto loan with a lower credit score.
