When sinking in quicksand or buying a car, it helps to have friends in high places.
Just like someone with better footing can throw you a rope and pull you out of the sand, they can also help you get better rates on an auto loan. Maybe that’s why many first-time car buyers get a cosigner for a car loan.
Read on to learn how and to discover the difference between a co-signer and a guarantor.
Guarantor vs. Cosigner Auto Loan
Guarantor and cosigner car loans are more similar than different. They both involve having a friend or family member share responsibility for your car loan so that you can get a better interest rate.
Guarantor car loans are more common in the U.K. They are not usually available in the U.S.
With a guarantor car loan, the guarantor’s responsibility for the loan is secondary to yours, and their credit score is only in jeopardy if you default on the loan. For instance, if you miss a payment, the guarantor’s credit score remains unaffected because the loan is not on their credit report.
With a cosigner for a car loan, you and the cosigner share equal responsibility from the beginning. This means the loan appears on their credit report, and any missed payments will also lower their score.
Both loan types are the same if you default, with the responsibility for payment falling to the cosigner or guarantor.
What is a Cosigner for a Car?
A cosigner is a friend or family member who agrees to pay off the loan if you can’t. Typically, the cosigner has a better credit score or history than the primary applicant.
As mentioned above, the loan with a cosigner will appear on both of your credit reports. That means it may be more difficult for the cosigner to take out a loan, as lenders will consider your car loan as outstanding debt for the cosigner.
How a Car Loan with a Cosigner Works
Now that we know the general definition of a cosigner car loan let’s explore it a bit more to see how it works.
Finding a Cosigner
The first step is finding someone to cosign the car loan with you. Because of the risk of paying off the loan and the inconvenience of having the debt on their credit report, a cosigner should be a very close friend or family member.
Getting the Signature
The actual loan application will be very similar, albeit with a spot for the cosigner to sign.
The cosigner does not need to go to the dealership with you to sign the loan papers. Most financial institutions accept electronic signatures or notarized documents.
Being Approved
The financial institution will consider your cosigner’s credit history and score when making a loan decision. If they have a great score, it can improve your chances of getting the loan.
For example, a recent college graduate with an excellent credit score may not get approved for a car loan because they don’t have a credit history. If a parent cosigned on the loan, the chances of approval may be improved if the parent has a long history of paying back loans.
Paying Back the Loan
As long as you never miss a payment, the cosigner for a car loan will never need to be involved after signing the initial loan application. However, if you miss a payment, they will immediately start taking over loan payments, and both of you will get hit with a credit score penalty.
If the worst should happen and you are unable to repay the loan, the cosigner will be responsible. If they also cannot repay the loan, the default will affect their credit score, too.
Finishing the Loan
As soon as you pay off the loan, your cosigner will breathe a sigh of relief. At this time, the loan will stop counting toward their debt-to-income ratio, making it easier for them to receive loans.
Pros of Co-Signing for a Car
What benefits do you receive by taking out a loan with a cosigner? Here are the biggest ones:
- Better chances of being approved
- Lower rates if approved
- Higher loan amount if approved
- Opportunity to build credit as you pay back the loan
In 2023, the average rate for a car loan for prime borrowers was 6.4%. Compare that to the rate for subprime borrowers at 11.7%, and you start to see how much you’ll save with a prime cosigner for a car loan.
A $20,000 car loan at 6.4% over five years will cost about $3,423.21 in interest over the life of the loan. That same loan with 11.7% interest will cost $6,511.77 in interest.
In this example, it’s worth almost $3,000 for a subprime borrower to get a prime cosigner.
Cons of Co-Signing for a Car
These are the main drawbacks of including a cosigner in the process:
- Shared financial responsibility
- Strained relationship
- Unwanted dependency
- Financial and credit risks
Even if you repay the loan on time, the process can be inconvenient for the cosigner. If you default on the loan, it’s a nightmare for them.
Do you need a cosigner for a car? If the answer is no, then it’s best not to ask a friend or family member to take on these disadvantages.
What to Consider While Borrowing a Cosigner Car Loan?
After weighing the pros and cons, it’s easy to see why many car buyers choose to use an auto loan cosigner.
To recap, a cosigner can help you save tens of thousands of dollars on a car loan, much like the money-saving habits of the super-rich. However, if you default on the loan, you may permanently damage your relationship with that friend or family member.
Frequently Asked Questions
What Benefits Do You Receive by Taking Out a Loan with a Cosigner?
As discussed in more detail in the blog above, the main benefits of using a cosigner to purchase a car include a better interest rate, increased chances of approval, and a larger loan amount.
Do You Need a Cosigner for a Car?
If you have a subprime credit score, you may save a lot of money by getting a cosigner on your loan. However, you probably don’t need a cosigner if you have a prime credit score, a solid credit history, and a good debt-to-income ratio.
Whose Credit Score Is Used When Buying a Car with a Co-signer?
The cosigner’s credit score will be considered first, but the financial institution will likely also consider your credit score when making the decision.
Does Having a Cosigner Help When Buying a Car?
Assuming that your cosigner has a great credit score, a long history of making payments on time, and a low debt-to-income ratio, yes, having a cosigner for a car loan should help you get a car loan with a lower rate and higher loan amount.