Buying a car is an exciting prospect, but for some, it’s not always easy. There are a few situations that make lenders wary, and it may mean you are unable to get a loan. Some of these situations including being someone with no credit or bad credit, or not having a steady, provable source of income. Another scenario that gives lenders pause is people who are self-employed. If you’re finding that you aren’t able to get a loan, or that the rate on the loan is too high, there is another option.
What Is a Cosigner?
A cosigner is someone who lends their good name (in other words, good credit), to make you more attractive to lenders. While it seems pretty easy, the crucial thing to think about is that a cosigner ends up responsible for your loan if you decide not to pay.
What are the Pros and Cons of Cosigning
There are some serious issues to think about if you’re considering a cosigner. Some typical cosigners include parents, family members, a spouse or even a close friend. Here are some pros and cons to using a cosigner:
PROS
- You can get the financing you need for a vehicle
- You may be able to get the vehicle you want or need
- Your interest rate may be lower
- If you’re responsible with repayment, you could see your credit score improve
CONS
- Another loan could increase your cosigner’s debt-to-income ratio
- You could ruin a cosigner’s credit
- You may make a poor choice and buy something you can’t really afford
Is a Cosigner Right for You?
When is it okay to get a cosigner? The answer is, after careful consideration. The last thing you need if you already have credit issues is to make things worse—and even more importantly—make things worse for someone else. That said, there are some things you can look at to determine if a cosigner is a good choice for your particular situation. For example, if you have the money and are already working to rebuild your credit, and you are sure you are going to be responsible, then get a cosigner. Another thing to look at is if you have a regular, secure job, simply lack the credit profile to get a loan; in that case a cosigner is a great way to get your foot in the door.
On the flip side, if you still can’t seem to hang onto money or pay bills on time, be honest with yourself. How is one more payment each month going to help you get better at repaying debts? If you are doing it to get a more expensive car, look at your priorities and reasons for wanting something pricier. If it’s just because you like it more but can’t afford it on your, then it may not be a good idea get a cosigner. Instead, wait until you can do it on your own, or find a ride you can afford by yourself.
In the end, both you and the cosigner need to decide if a car is work the financial risk. There are always ways to work toward improving your credit and purchasing a car when you have your finances in order.
How to Approach your Potential Cosigner
If you’ve decided you’re a great candidate and that you want to move forward with a cosigner, the next big step is the approach. You need to provide the right information to show a potential cosigner that you are responsible, and have thought about how you will make the situation a success. Here are some things you’ll want to do:
- Be transparent with your financial situation – This means providing income, debt, credit report and showing them what you’re doing to improve your credit if it’s bad. Also, show them your budget, and how a car loan and other related car expenses will fit into your finances.
- Have a plan for paying the loan back – The cosigner may get that you have income and you can pay each month, but you should show them a backup plan as well. What happens if you lose your job? Show them where income will come from, or ways that you will save and earn extra cash so you're prepared.
- Show them that you exhausted all other options – A cosigner may want to make sure you tried every other avenue first. Explain to them why you need a cosigner, and why it is better than any other avenue—or why it may be the only avenue.
Cosigning is a great tool, but it comes with great responsibility and risk. Do your research and ask yourself the tough questions before getting a cosigner for your used car loan.
