Getting a cosigner is the financial equivalent of calling in reinforcements. Cosigners offer prospective lenders more than just a “vote of confidence” for a borrower from a friend or family member. That friend or family member becomes a second party to sign on the dotted line for the auto loan.
There are two reasons an applicant might want or need a cosigner. The first is to get loan approval; the second is to get a better interest rate.Here are some considerations for all parties involved.
Using a Cosigner to Get Loan Approval
What makes someone more likely to get approved for an auto loan? The answer is more than just a good credit score. It's also a broader perspective on personal economic stability-a lengthy history of making on-time payments and gainful employment are two major components, for example.
Local lenders often are better at taking your entire credit history into account, but past handling of a loan (especially handling of a loan in the recent past) is how lenders judge risk. For those with gaps in employment or past credit mistakes, this risk recipe may not work in your favor.
But it can also be challenging for others, especially young, first-time borrowers. For those getting started in professional life, the absence of credit and employment history can make loan approval almost as challenging as it is for prospective borrowers with a negative credit history. After all, while you may be a future holder of perfect credit after years of successful, on-time payments, your prospective lender needs hard evidence, regardless of how trustworthy they might believe you to be.
Both of these scenarios are opportunities for cosigners to play an important role. A cosigner can be any person-related or not-who is willing to sign on to your loan. From a lender's perspective, gaining the signature of an established buyer with a strongly positive credit history (cosigners with poor credit history won't provide much help) gives them more confidence that the loan will, in fact, be repaid.
Using a Cosigner to Get a Better Interest Rate
Even if you feel confident you can win loan approval, it may come at a significant cost. Borrowers with low credit scores (or no credit) could pay double-digit interest rates to make up for their perceived risk to the lender. From a lender's perspective, this risk is mitigated by a cosigner.
A consigner may save you ten percentage points on your interest rate, which adds up to thousands of dollars saved on interest payments over the duration of the loan. If having a car is a necessity but also a stretch on your budget, securing a lower interest rate may make owning a vehicle more manageable.
Simultaneously, a lower interest rate and lower monthly payments increase the chances that you'll be able to pay off the loan in full, boosting your own credit score and making it more likely that, the next time around, you'll be able to get a better interest rate without the support of a cosigner.
Considerations for a Cosigner
For a borrower, a cosigner often sounds like a dream come true-a way to take advantage of a friend or family member's long credit history to make your goal of car ownership possible. Just remember that from the cosigner's perspective, this is a big step. And while it has a positive impact for you, the cosigner assumes the risk for a loan from an unproven borrower.
A few things to keep in mind if you are cosigning another's loan:
Other Benefits of a Cosigner for a Car Loan
What other role might a cosigner have? For one, bringing your cosigner to the dealership could help you make a reasonable choice of vehicle-one that best fits your current financial situation. Someone cosigning on your loan may not be willing to splurge for the sports car of your dreams and encourage you to make a more practical decision while you build or repair your credit. Additionally, a cosigner provides added incentive-and, perhaps, occasional reminders-to stay on track with your loan repayment.
If you're unable to find a cosigner, there are other ways to increase your chances of loan approval. Bringing a down payment to the table reduces the overall amount of money borrowed, decreasing the risk for the lender and increasing your chances of approval. Less money borrowed also typically leads to lower interest rates and shorter loan duration, all positives for a borrower.
If you have a close friend or family member committed to helping you but unable or unwilling to cosign for your loan, they may be able to help you with your down payment. If they can afford to spare the cash, this offers a lower risk way for them to help you toward your goal of car ownership.
No one in lending likes surprises-the lender, borrower, or cosigner. Stability and predictability work best for all parties, and that's where the cosigner can play an important role.
Whether you're recovering from past credit issues or just starting out, a cosigner provides a lender with greater confidence that a loan will be repaid. That confidence, in turn, is reflected in a greater rate of approval and lower interest rates, which help borrowers stay on track. And if you have a cosigner who's committed to helping you navigate the process and ensure repayment, everyone comes out ahead.
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