If you’ve never gotten a car loan or a loan of any kind before then you’re probably going to need a loan co-signer in order to qualify. But what does it mean to co-sign a car loan? And more importantly, how do you know who should be yours? What does it mean for the person who co-signs for you? All these questions will be answered in this article.
What is a Co-Signer For a Car Loan?
Quite simply, a co-signer is someone who signs a loan alongside you, which means that if you default on the loan your co-signer takes on your debt instead.
Lenders like this because it means there’s less risk to their investment. If you’ve never paid a loan before they don’t know if you’re trustworthy or if you’ll be able to repay the loan at all. A co-signer means that no matter what they’ll be getting their money back.
Who Should Co-Sign?
As you can imagine, if you’re going to ask someone to possibly take on all of your debt, it needs to be someone who has a lot of trust in you not to do that to them. Usually this means a parent or other close family member.
Trust is the requirement on your end, what the bank wants is someone reliable. Your co-signer should ideally be someone with a high credit score and good credit history. Anywhere in the above 700 range. This is something you should discuss with your co-signer before ever talking to the bank.
If your co-signer has a poor credit score then it might defeat the purpose and the lender might still reject your application, since the idea is to reduce risk. And to banks, low credit means risk.
Should You Always Have A Co-Signer?
Having a Co-Signer on a car loan does have advantages even if it’s not your first loan, Co-signers can also help improve your interest rates and the amount you can borrow if you yourself have a low credit score. And even if you don’t, banks like them because they’re added insurance to a loan.
The issue with that plan is probably a more personal one. Convincing someone to continue Co-signing your loans when it’s no longer required may push some relationships to the breaking point.
If you got a loan with a co-signer, it is possible to remove them from the loan by refinancing. If you refinance the loan with the same bank or possibly a different one, you may end up with a higher interest rate but you can specify that you’d like to remove the Co-signer, freeing them from any risk.
Thanks for reading! Whenever you’re ready for your next car loan, we’d love to help with that. Click here to get pre-approved online today.