when do you need a cosigner for a car

When Do You Need a Cosigner for a Car Loan? 

Most car purchases today are paid with auto loans. But securing a loan as a sole applicant is not always a sure thing, especially for young borrowers who may be buying a car for the first time. If you find yourself struggling to get approved for an auto loan, adding a cosigner to your application could solve your problem. 

Let’s look at what exactly a cosigner is and when you may need one for your car loan. 

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What Is a Cosigner? 

A cosigner is a third-party, often a family member or close friend, who agrees to take joint responsibility for paying back a loan. The cosigner is obligated to step in and repay the outstanding loan balance if the primary borrower falls behind or cannot continue to make the loan payments. 

Adding a cosigner to your car loan application can greatly improve the chances of securing a loan, especially if you have a limited or poor credit history. A cosigner provides the lender with additional assurance that the loan will be repaid but does not have a share of the asset.  

“Co-borrowers are generally people who share expenses and, most times, the asset,” says Ted Lyons, vice president of Financial Services at AAA Northeast. “Cosigners are usually added to loan applications to help with limited credit applicants or borrowers who have limited income. They are there more to step in should the borrower not pay.” 

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When Do You Need a Cosigner for an Auto Loan? 

When You Have a Poor or Limited Credit History 

Generally, there are two situations when you will need a cosigner. The first is if you have a limited credit history. In this case, since you have yet to prove your creditworthiness, a lender will want a cosigner who has a track record of repaying their debts. The other circumstance is if you have a less-than-ideal financial situation. This can include a poor credit score, limited income, a high debt-to-income ratio and unstable employment. 

Some banks may decline your loan application outright based on your credit and financial profile. If this happens, you will have no choice but to find a cosigner (or see if another lender is willing to work with you). 

When You Want to Get a Better Rate 

If you qualify for a car loan on your own, a lender cannot require you to have a cosigner, but it may still be beneficial to have one. A cosigner can help you secure the best loan terms, including the lowest interest rate. The average loan rate on a new vehicle for prime borrowers (those with credit scores of 661-780) was 6.4% by the middle of 2023, according to the credit bureau Experian. The rate for subprime borrowers (601-660 credit scores) was nearly twice as high at 11.7%. Based on this data, submitting a car loan application with a credit score just 60 points higher could cut your loan interest nearly in half. 

It’s important to know, however, that lenders apply loan rates differently, Lyons says. “Some lenders will assign the rate depending on the highest credit score, some the average, some the lowest and others, based on the credit score of the individual the vehicle is registered to.” 

What to Look for in a Cosigner 

“Choose a co-applicant wisely, they can hurt as much as they help,” Lyons warns. “You will want to consider one who has a good, established credit history.” 

While there is no singular profile of a desirable cosigner, there are a few things to look for. On the financial front, they should have at least a “good” credit score of 670 or higher. The cosigner will also have to prove they have enough money to repay the loan in the event you cannot. Lenders will decide this based on a cosigner’s income and any outstanding debts they currently have on the books. 

Finances aside, you also want to trust the person cosigning an auto loan. The last thing you need is someone leaving you high and dry should you fall on tough times and become unable to meet your monthly loan payments. Asking a reliable friend or family member to be your auto loan cosigner always is the best bet.  

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