Pros and Cons of Having a Cosigner on an Auto Loan
Adding a cosigner for car loans can improve chances of approval for borrowers with limited credit or income. However, cosigning a loan comes with several risks.
The cosigner is legally responsible for the debt if the primary borrower can’t make payments. Any late or missed payments can negatively impact both parties’ credit scores.
Furthermore, the cosigner doesn’t have any ownership of the vehicle. Consider the pros and cons of cosigning an auto loan to ensure it’s the right move for you.
Pros and cons of cosigning a car loan
While a creditworthy cosigner can help you get approved for a car loan, it’s a big commitment for the cosigner. Consider the following pros and cons before proceeding with a cosigned loan.
| Pros | Cons |
|---|---|
Improve your chance of loan approval Potentially qualify for lower rates and more flexible terms Making on-time payments can help establish or rebuild your own credit | Missing a payment could damage your cosigner’s credit The cosigner may face penalties if you fail to repay the debt Possible strain on your relationship with the cosigner |
What does cosigning a car loan mean?
Cosigning a car loan means you agree to be legally responsible for the debt if the original borrower can’t make payments. Some lenders require a cosigner if the borrower has bad credit or a high debt-to-income (DTI) ratio.
Even if a borrower can qualify independently, adding a creditworthy cosigner can often unlock more competitive interest rates and better terms.
Cosigner vs. co-borrower
Borrowers can typically add a cosigner or co-borrower to their loan application. While these terms may seem similar, they mean two different things.
- Cosigner: This is a person with solid credit and income who can help boost your chances of approval. Although liable for payments if you default, the cosigner doesn’t share vehicle ownership. They also generally don’t make regular monthly payments.
- Co-borrower: Also known as a co-applicant, the co-borrower shares financial responsibility and ownership of the car from day one. Their name will likely appear on the car title with the other borrower. Both borrowers typically contribute toward monthly payments.
When to consider a car loan cosigner
A lender might encourage you to find a cosigner before applying if any of the following situations apply:
Credit issues: If you have a low credit score or have experienced recent damage to your credit report, adding a cosigner with a good to excellent credit score could boost your car loan application. (Check your credit score here.) Likewise, you could consider a cosigner if you need a car loan with no credit history.
Employment history: A spotty or unreliable employment history could jeopardize your loan application. Consider finding a cosigner who meets the lender’s employment criteria, or see if you can improve your income before applying.
High DTI ratio: Borrowers with a lot of debt compared to their monthly income might not qualify for an auto loan on their own. You can calculate your DTI ratio by dividing your monthly debt payments by your overall monthly income. It’s best to keep your DTI ratio below 43%, although under 35% is ideal.
Ultimately, a cosigner can increase your chances of loan approval, since having a backup person ready to repay the debt reduces the lender’s risk. And remember, the higher your cosigner’s credit score, the more likely you’ll be to receive a low interest rate.
Cosigner rights and responsibilities
When you cosign an auto loan, you use your name and positive credit history to help a friend or family member get the car they need.
While you won’t have any legal rights to the vehicle unless granted permission, you must be prepared to cover payments, late fees and collection costs if the borrower defaults.
Failing to keep up with car loan payments will negatively impact your credit score. At the same time, you might have financial obligations if you need to sell the vehicle with a loan.
Because of this, it’s worth asking to receive copies of billing statements and late notices to ensure your credit remains intact.
How to cosign a car loan
Since cosigning means sharing financial responsibility for the debt, both the primary borrower and the cosigner must complete the loan application. Here are the steps to getting a car loan when you plan to have a cosigner.
1. Check credit scores
Lenders review your and your cosigner’s credit reports to determine your level of creditworthiness. You can access your free credit report via AnnualCreditReport.com. Be sure to scrutinize these reports and submit a dispute if you notice any errors.
You can also check your credit score before submitting a loan application to know where you stand. Even if you have a good credit score, adding a cosigner with a higher score can improve your chances of approval and help you secure a lower interest rate.
2. Compare lenders
You can apply for a car loan with a credit union, a bank or an online lender. Some auto companies, such as Toyota and Ford, provide their own car loans.
Many lenders help you make an informed decision by offering preapproval for an auto loan. While a preapproved offer is just an estimate, it allows you to compare general interest rates, terms and fees in advance, helping you find the best lender for your needs.
3. Gather important documents
Having essential paperwork ready can help you hit the road faster. While lenders will have their own requirements, here are some standard documents needed for a car loan:
- Proof of identity
- Proof of income
- Credit and financial history
- Proof of residence
- Vehicle information
- Current vehicle registration
- Proof of insurance
- Down payment
4. Apply and review
Most lenders offer a streamlined application process and aim to provide a credit decision within a few hours, although some might take up to a few days.
If you need funds fast, consider applying for instant auto loans, which are usually approved in less than an hour.
When reviewing auto loan offers, consider details such as down payment, annual percentage rate (APR), dealer costs and fees, terms, monthly payment and whether the purchase comes with tax-deductible benefits.
You can also check out our in-depth auto lender reviews to discover more about what each lender has to offer and find one that’s a good fit for you.
5. Close on your car loan
After picking your lender, you must finalize the car loan and sign any required paperwork with your cosigner. Your auto financing contract will outline the total sales price, the amount borrowed, your APR, the financing charge and your monthly payment.
Remember, your cosigner isn’t usually responsible for making regular payments — they’re just there in case you can’t repay the loan.
Make sure to read all the fine print before closing since you generally can’t return a car after signing. If you see any fees you don’t understand, ask for more clarification. You can also have your cosigner review the paperwork before finalizing your decision.
Risks of cosigning
Your cosigner has to sign the car loan documents along with you, agreeing to cover payments if you fail to repay the debt.
Make sure your cosigner understands the potential risks of cosigning an auto loan:
- Credit risk: The auto loan will appear on both your and your cosigner’s credit reports. Missing a car payment or having a car repossession could seriously damage your cosigner’s credit scores, making it harder to gain approval for loans and credit cards in the future.
- Financial risk: If you miss payments, the lender may go after your cosigner for the money, plus late fees, or even file a lawsuit against your cosigner to garnish their wages.
Keep in mind that if you stay current on your car loan, both you and your cosigner are likely to see your credit scores improve.
Where to find auto loans with cosigners
Many auto lenders allow cosigners, so you should have plenty of options to explore. Here are some ideas to get you started:
- Your current bank. Credit unions and traditional banks tend to offer the most competitive rates on auto loans. You might even get a discount for being an existing customer.
- An online marketplace. You can search our online marketplace for best auto loans to compare multiple lenders at once, filtering for specific features such as loan amounts or time to funding.
- In-house financing. While an in-house dealership loan offers fast approval, they tend to come with high rates, strict terms and penalties and limited selections.
Enter your details into our car affordability calculator below to see how much you could afford each month:
Alternatives to cosigning a car loan
Not everyone can find an eligible cosigner willing to risk cosigning an auto loan. Borrowers can increase the chances of loan approval on their own by following these steps:
- Find ways to boost your credit score
- Increase your income, maybe by starting a side hustle
- Focus on paying off existing debt
- Save more for your car’s down payment
You can also consider an auto loan for bad-credit borrowers. While these lenders typically have less strict eligibility criteria, you will likely pay more interest over the life of the loan.
Frequently asked questions
Yes, cosigning a loan can have a positive or negative impact on your credit score, depending on how payments are handled.
If the borrower makes on-time payments, both the borrower’s and cosigner’s scores will likely increase. However, missing loan payments are among the top actions that can hurt your credit score.
Because of this, it’s worth asking for copies of the loan statements to be sent directly to you, the cosigner. This way, you can stay on top of the loan’s status, immediately stepping in if you suspect a payment will be late.
While there’s no standard credit score to buy a car, lenders typically prefer you or your cosigner to have a FICO Score of 660 or higher.
However, some lenders offer bad credit auto loans for borrowers with scores as low as 500 — just be prepared to pay a higher rate for such loans.
Generally, the higher the score, the better your chances for getting approved with a low interest rate and flexible repayment terms.
If your cosigner has an excellent credit score, you will likely receive a lower auto loan interest rate. And usually, the lower your interest rate, the lower your monthly payments.
Alternatively, you can opt for a longer repayment term to reduce your monthly car bill. However, a longer term typically results in more paid interest over the life of the loan.
A cosigner’s name only appears on your loan contract, not on the car title. That’s because the cosigner only shares legal responsibility for the debt, with no ownership of the vehicle.
However, if you have a co-borrower, their name will appear on the car title. If you want to change it so you are the sole owner, you will have to apply for a car title transfer.
Removing a cosigner from a loan can be difficult. Your loan contract may have a clause that allows you to release the car loan cosigner under certain conditions, like after making a certain number of on-time payments.
If the lender doesn’t offer cosigner release, you could try refinancing your car loan or selling the car so you can repay the loan early.