Do I Need a Co-Signer for my Car Loan?
Many people who need a car loan have no credit, less-than-perfect credit or insufficient income to successfully qualify. What to do?
Having a co-signer may be the answer.
What is a co-signer?
A co-signer for auto loans is actually a co-borrower, but not necessarily a co-owner of the car being financed. We'll explain that part in a moment.
A co-signer is someone who agrees to be responsible if the primary signer/borrower defaults (fails to make payments) on a loan. A co-signer is equally obligated and has the same responsibilities as the primary borrower. When you make application for a loan, you specify which signer should get monthly payment statements.
Both parties to a loan will have the loan show on their credit reports, as if each was totally responsible and had taken out the loan in their own name as an individual. If the loan goes into default (neither party pays), both parties' credit report and credit history will be negatively affected.
How does it work?
Both borrower and co-signer sign the loan application. During the approval process, the loan company or bank will base the approval on the signer with the highest credit score, which is usually the co-signer. For income qualification, the combined income of both signers is typically considered.
At the time of application, the borrower/signer and co-borrower/co-signer specify who will be making monthly payments. Payment statements will be sent to that person each month. If payments are late or missed, the loan company will contact the co-signer to make the payment. If the co-signer fails to pay, the loan can be declared in default, followed by repossession status at which time the car is recovered by the loan company and sold at auction. Both borrowers are then responsible for paying the remaining loan balance after the auction sale amount has been deducted. The credit reports of both borrowers are negatively affected. A repossession stays on the report for a maximum of seven years.
Who owns the car – signer or co-signer?
Either or both, depending on what the parties want. Auto loan co-borrowers do not have to be co-owners.
Actually neither completely owns the car until the loan is paid off and a clear title has been received from the lender.
However, at the time of loan application, the parties decide on whose name will be put on the car's title. Normally, if the co-signer is not the signer's spouse, the title is usually only in the name of the primary signer. In this case, even if the signer defaults and the co-signer takes over payments, the car still belongs to the primary signer — regardless of who actually made payments. This point is frequently misunderstood.
Co-signer considerations
Being a co-signer is a serious responsibility. It should not be taken upon lightly. If you are considering being a co-signer and don't believe the primary signer will be able to handle the loan, don't co-sign unless you are fully willing to take on the payments yourself.
Boyfriends and girlfriends often co-sign for each other on car loans and then break up later, which usually leads to problems. A co-signer cannot simply remove themselves from a loan agreement. Friends who co-sign together can become unfriendly later. Even husbands and wives can get a divorce and have co-signer problems.
What if I don't have a co-signer?
If you have no credit, poor credit, or low income with excessive debt, you will likely find it very difficult or impossible to get approved for a conventional car loan without a co-signer. If so, your options become very limited. You could consider borrowing from friends or relatives, selling some things you have, or borrowing against your home (home equity loan) — or simply saving money to pay cash.
One remaining option is to buy your car from a dealer who finances his own cars and doesn't check credit. One such national dealer is Drivetime.com
. Expect to pay a higher interest rate, but if it's the only way you can get a loan, it might be the right solution.