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Do You Need a Co-Signer for a Car Loan?
A car is a major purchase that most people must finance. However, you may have trouble qualifying for an auto loan if you have poor credit or lack an established credit history. In that case, you may consider asking someone to co-sign for you.
In this post, the experts in financial dealer services at 1803 Capital answer commonly asked questions, including “What is a co-signer?” “How do you choose a co-signer?” and “When do you need a co-signer for a car loan?”
What To Know About Co-Signers for Auto Loans
If you cannot afford to pay for a car in full at the time of purchase, you’ll need to take out an auto loan. When applying for financing, you are asking to borrow money from a bank, credit union, or dealership.
After receiving your application, lenders check your “creditworthiness.” In other words, they evaluate how likely you are to pay back the loan. Their review includes information such as your credit score, source of income, and ability (and willingness) to contribute money to a down payment.
If the financial institution doubts whether you can repay the funding, they may deny your application. Or they may approve the loan but at a very high interest rate. In these cases, you may need someone to co-sign with you.
What Is a Co-Signer?
Before answering, “Do you need a co-signer for a car loan?” let’s answer, “What is a co-signer?”
A co-signer is a person who agrees to cover your car payments if you cannot. As the name suggests, a co-signer signs the loan jointly with the borrower. This gives lenders a legal backup repayment source, making borrowers more likely to qualify for financing.
In co-borrowing agreements, both borrowers receive the funds and must repay them. However, in co-signing agreements, the primary borrower is responsible for making the monthly payments. Co-signer responsibility only kicks in if the primary borrower misses payments or defaults on the loan.
When Do You Need a Co-Signer for a Car Loan?
You need someone to co-sign when your credit profile makes it hard to get financing — or to get financing with good terms. Specifically, you may consider a co-signer if you:
- Are unemployed, make a low salary, or have inconsistent income
- Have poor credit or a minimal credit history
- Have a high debt-to-income ratio (how much you owe vs. how much you make)
- Can’t afford to make a reasonable down payment
- Only qualify for loans with very high interest rates
- Receive approval for a longer loan term (longer than three years)
- Might struggle to afford the monthly payments
- Want to improve your loan approval chances
How Do You Choose a Co-Signer?
Co-signing is a big responsibility. You should find someone you trust and have a good relationship with. A family member (such as a parent or grandparent) is usually the best option, but you can also ask a close friend.
Importantly, co-signers must have a strong credit profile. Otherwise, their promise to repay won’t be strong enough to override your credit problems. Co-signers must typically meet the following criteria:
- Good credit (often a score above 700)
- Clean credit history
- Steady source of income
- Good debt-to-income ratio
- The ability to make loan payments if you can’t
Once you find a suitable co-signer, you both apply for pre-approval. The lender performs a credit check on both applicants and makes decisions based on both profiles.
Need Help With Car Financing? Contact Us Today
If you have poor credit or limited credit history, the answer to the question, “Do you need a co-signer for a car loan?” is often yes.
At 1803 Capital, we know how hard it can be to qualify for a loan with less-than-perfect credit. That’s why we offer worthy customers a second chance to finance a car through a dealership. We look at more than just your credit score when making lending decisions.
Contact us today for more information.
