Buying a New Car with a Cosigner
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If you’re considering buying a new car, finding a cosigner for your auto loan could make a notable difference when it comes to interest rates or even getting approved for financing in the first place. However, it also involves some risk for the cosigner. Before you ask someone else to cosign your auto loan, be sure to consider all of your options and understand how both your and your cosigner’s credit histories come into play.
When should you get a cosigner?
Finding a cosigner can be particularly advantageous if you have the income and savings to pay off an auto loan but lack enough of a credit history to get approved or secure a favorable interest rate. In this case, a family member or friend may be more willing to cosign your loan because you can show that you will be able to make your monthly payments.
Lenders will look at your credit scores and credit history to determine whether to approve you for an auto loan, as well as what terms to offer you. Having little or no credit history or low credit scores could stop you from securing financing for your new car. In that case, the lender might require a cosigner.
Even if you can get approved on your own, finding a cosigner might still benefit you. Maybe your credit history is not so bad that it precludes you from securing a car loan, but your credit scores are low enough that your interest rate and monthly payment are too high for you to maintain. Having a cosigner with good credit scores will make the interest rate and other terms more affordable.
What are the risks of cosigning?
Cosigning is a great way to help out a friend or family member, but you’ll need to understand the obligation you’re taking on and how it could affect your credit history. If the person you’re helping isn’t able to pay back their loan, the repercussions could be devastating to you.
For example, you will be held financially responsible for the debt and may have to pay it back yourself. The lender could also hold you responsible for any collection costs or late fees.
What are options outside of a cosigner?
Consumers looking for a loved one to cosign could end up damaging family relationships if they do not make payments. If your family members do not want to take on the risks of cosigning to help you get auto financing, there are alternative ways to overcome the obstacle of a limited credit history or poor credit scores.
One way is to continue to save money so you can afford a larger down payment, which might facilitate approval without a cosigner or secure you a lower interest rate on your loan. You could also simply wait to buy a car until you have built up your credit history or improved your credit scores.
If you do decide to pursue a cosigner, avoid damaging your personal relationship by keeping communication clear between the two of you and doing everything in your power to keep up with your loan payments.