If you are having trouble getting a vehicle loan, getting a cosigner on your loan may be a great option for you. Or if your friend or family member is having trouble securing a loan, they might ask you to become a cosigner on their loan.
While cosigning a loan might be a good move, it's a decision that should not be taken lightly. There are advantages and disadvantages for both the person seeking a cosigner AND the person asked to cosign.
Here’s everything you need to know about cosigning a vehicle loan.
What is cosigning?
Cosigning for a loan is when you take on the responsibility of someone else’s debt. This means that you become 100% responsible if the original borrower cannot make payments anymore.
Maybe your friend has pretty bad credit. They look around for a loan to buy their new car, but they are either unable to find a loan or unable to find a loan with a reasonable auto loan APR. One way for them to increase their likelihood of getting approved and getting a decent auto loan APR is to secure a cosigner.
When a cosigner is used for a loan, the lender will look at the two applicants’ information together to determine the terms and the car loan APR. So if the applicant has bad credit (or no credit), the cosigner will shoulder some of the financial burden. The lender is more apt to give a better car loan APR, because the chances are higher that the loan will be paid back.
There are advantages and disadvantages to securing a cosigner, so discussing this thoroughly beforehand is incredibly important.
What are the pros and cons of cosigning?
The Pro of Asking for a Cosigner: You Can Secure a Good Car Loan
If you have no credit or bad credit, a cosigner might be the only way you are able to get a car loan for yourself. The lender will not only consider your income and credit score, but will consider the income and credit score of your cosigner.
The Pro of Becoming a Cosigner: You Can Really Help Your Loved One
If a friend or loved one asks you to cosign, chances are they are having a tough time financially. Cosigning a car loan for them is a great way to help them out of a tight spot. By helping them secure a good car loan, you are helping them get a good car loan APR. And this will make their car loan payments more manageable. All of this can help them to build credit and pay their bills on time. If you trust your loved one and want to help them out, this is a great way to do so.
And bonus: if the borrower pays all of their bills on time and in full, it can boost your credit score as well as theirs.
Cons of Asking for a Cosigner: You are asking them to be financially responsible for you
If you ask a loved one to cosign, you should be positive that you will be able to make payments on your loan. Defaulting on your car loan will make your cosigner responsible for the entirety of your loan, so they will be stuck with a huge bill. If you are late with your payments or miss payments, you will hurt their credit score. In other words, your actions will have consequences for your cosigner. This can, and has, ruined many relationships. Be aware of this and proceed with caution.
Cons of Becoming a Cosigner: It puts you at risks and decreases your borrowing power
As we said above, when you cosign a loan you are taking on all of the responsibility of the original borrower. Late payments, missed payments, and defaults can all affect your credit score negatively. Should the borrower default, you may be open to liens, wage garnishment, and lawsuits.
Cosigning will also affect your borrowing power. This debt will be added into your debt-to-income ratio, which may affect the loans you are offered if you need to secure a loan for another reason.
Can you refinance a car with a cosigner?
If you already have a car loan but don’t have a great car loan APR, you may be wondering how to refinance a car with a cosigner. Or, you may be wondering how to refinance auto loan to remove cosigner. Either way, Auto Approve has you covered.
It isn’t possible to simply add or remove a cosigner to an existing loan. This is because each car loan has terms and a car loan APR that depends on the finances of the applicant (or applicant). In the eyes of the lender, adding or removing someone from the equation will affect the likelihood that the loan will be paid back in full.
Refinancing your existing car loan with Auto Approve is super simple. Just follow the steps below to refinance your loan and either add or remove a cosigner.
If it seems like car refinancing might be a good idea for you, let’s go over how to start the process of refinancing. It is pretty hassle free, especially when you enlist Auto Approve to help you compare rates.
- Do Your Research. Go online and research different lenders to decide where you would like to apply. Look at customer satisfaction ratings and read reviews to get an idea of what each lender is like. If you use a company that specializes in car loan refinance, like Auto Approve, you can save yourself a lot of time and energy on this part.
- Prepare yourself. Make sure your credit report is accurate and report any discrepancies to the bureau. You want your score to be as high as possible when you apply. Also be sure to check your existing loan to determine if there are any prepayment penalties for which you will be responsible.
- Decide and apply. Select three to five lenders and apply for car loan refinance. You will need to submit some documents with your application, such as a photo ID, proof of income, proof of residence, vehicle information, and proof of insurance. Your co borrower will need to provide this information as well.
- Compare offers. Look at all of the offers and consider the car loan APR, the repayment period, the customer satisfaction, and the fees and penalties. See what make the most sense for you (Auto Approve can help with this as well)
- Sign and save. And that’s it! Refinancing really is that quick and easy.
And that’s what you need to know about cosigning a vehicle loan.
Thinking about refinancing your car? Get your free quote from Auto Approve today to get started!