Auto Loan Cosigners - What You Need to Know
Getting a car is a big step toward financial independence, but buying a vehicle can be difficult if you have a limited or less-than-perfect credit history. That’s when having an auto loan co-signer can help. We answer your questions including:
What is an auto loan cosigner and how does the process work? Keep reading to learn everything you need to know about auto loan cosigners.
WHAT IS A COSIGNER?
A cosigner is a person—usually a parent, close family member, or friend—who pledges to pay back your loan if you do not. By promising to pay if you are unable to, the cosigner backs 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
A cosigner agrees to make up any missed payments. They are financially liable for making sure the loan is paid off on time, even though they might have no legal rights to the vehicle.
WHEN DO I NEED A COSIGNER FOR AN AUTO LOAN?
You may need a cosigner if you are applying for an auto loan but you lack credit history or your credit is poor. This is often the case with young people starting out or for people with irregular or low-paying employment.
While cosigning a loan is a big commitment, it can be important if having a car allows a person to start a job or travel to college. It also allows parents and children to share the responsibility of owning and paying for a car.
WHAT ARE THE BENEFITS OF AN AUTO LOAN COSIGNER?
Sometimes having a cosigner is the only way to qualify for an auto loan if you need to buy a car but your credit is non-existent or very poor. More often, however, having a cosigner helps to make your vehicle far more affordable.
Paying off what should be a reasonably priced used car can become crippling if you are only able to qualify for a high interest rate “subprime” loan, or if you have to pay off the loan over a long period. Having a cosigner can help you qualify for a regular or “prime” loan at a far lower annual percentage rate (APR) and pay off your loan over a reasonable period.
Having someone willing to cosign for you can make the difference between reaching financial independence and falling into a cycle of perpetual debt.
ARE THERE DRAWBACKS TO AN AUTO LOAN COSIGNER?
It may be difficult to find someone willing to put their credit on the line for a person who has no proven payment history. Trust between the signer and co-signer is important. Cosigning for someone could impact the cosigner’s borrowing power, debt-to-income ratio, and credit score for the life of the loan. It could also damage the relationship between the signer and cosigner if the signer is unable to fulfill the loan requirements, putting the loan burden on the cosigner.
CAN I ADD A COSIGNER TO AN EXISTING AUTO LOAN?
It is possible to add a cosigner to an existing auto loan, but only if you refinance it. This might not be an option with some subprime “bad credit” auto loans.
If you can refinance, in many cases you will also be expected to have held the loan for at least a year and to have made regular payments during that time. This will be taken into account along with the financial background and credit history of the cosigner.
This should allow you to refinance at a better APR or reduce the term of your auto loan.
HOW TO REMOVE A COSIGNER FROM AN AUTO LOAN
The best way to remove a cosigner from an auto loan is to pay off the loan. However, you may need to remove a cosigner from a vehicle loan before it is paid down if:
- A cosigner is no longer willing or able to support the loan obligation
- Your financial situation has improved and you wish to release a cosigner
There are two routes to removing a cosigner from a loan.
The most common route is to refinance the loan under your name alone. This is essentially an entirely new loan, but it will be linked to the outstanding balance and term of your original loan. The APR and term will now be based solely on your creditworthiness and financial background, and on any additional money you might be able to put down.
Some lenders might offer a cosigner release that removes a cosigner from the paperwork and makes you solely responsible for paying off the loan. The lender will again be able to adjust the interest rate and term of your loan to reflect the loss of your cosigner’s credit.
However, you might end up paying significantly more on your loan. It will help your case if you have been making timely payments on the loan without depending on your cosigner. Keep in mind that not all lenders offer cosigner releases.
EXPLORE AUTO LOAN COSIGNERS WITH RED RIVER CREDIT UNION
Finding an affordable vehicle in today’s market can be tough. At Red River Credit Union, we work with our members to help you buy or refinance a great ride. This can mean working with an auto loan cosigner or going at it on your own. We’re here to help.
We offer competitive rates, quick approval, and flexible payments options for:
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Rate and term based on credit score and year model (auto). Rate subject to change without notice. With Approved Credit.