If you have a bad or poor personal credit history, using a cosigner can significantly increase your chances of being approved for a new or used car installment loan. Basically, a cosigner guarantees that you will meet your obligation of making all of your payments, on time, to the lender; furthermore, a cosigner promises to pay the lender in the event that you cannot make your payments or otherwise default on the terms of the auto loan contract. You should be aware of the basic car loan cosigner requirements usually associated with a loan application. Here is a list of general requirements to use as a reference:
- Creditworthiness of the Cosigner Willingness to Cosign on Your Loan
This probably seems obvious; however, your cosigner must be willing to actually sign a contract and pledge that he/she will pay the lender all amounts due on the loan, in the event that you do not. Banks or lenders will not accept an informal verbal agreement, or promise, from the cosigner on your behalf. The pledge and guarantee to pay must be in writing.
In order for your cosigner to be accepted by the bank or lender, the cosigner is usually required to have a good or excellent personal credit rating. Generally, lenders will require a potential cosigner to have a credit rating score of 700 or above. People with this range of credit score, and higher, are generally very financially responsible and pay their bills and obligations on time. If you have bad credit, your cosigner and needs to have excellent credit.
- Proof of Your Cosigner's Ability to Pay
Your cosigner will probably be required to produce evidence of sufficient income and/or assets to cover the amount of the loan obligation, in the event you cannot pay. The bank or lender may require pay stubs or wage vouchers for employed cosigners; if the cosigner is self-employed or a business owner, the bank may require income tax returns for previous years. If your cosigner cannot prove that he/she is financially capable of paying the obligation, the bank or lender will probably deny the loan application.
- Stability in Employment and Residence
Although not quite as strict a requirement as the others, many banks really like to see stability, in terms of employment and residence, for your cosigner. When looking at cosigners, banks like to see individuals that are well-established and have roots in their community. They favorably view cosigners that have lived at one address for five or more years and have worked at their present job for a relatively long period of time. There are certainly exceptions to this requirement; however, potential lenders place significant value and weight in the stability of your cosigner when making a decision regarding a loan application.
CarsDirect Finance Services
If you're seeking car loans to pay for a car, you may consider getting a loan through CarsDirect. We work with a network of dealers who specialize in this area of financing. The dealer has access to a number of financial institutions and will shop around to find you the best deal. Simply fill out a quick and easy application, and you'll be on your way to getting your new car and avoiding having to deal with car title loans. The service is free and absolutely no obligation is required.
Advantages of Using a Cosigner for a Car Loan
When a potential car buyer lacks credit history, whether they are a student, a first-time driver, or a consumer with a less than a stellar track record in the financial arena, arranging for a cosigner on an auto loan makes all the sense in the world. There are many reasons to go with a cosigner for an auto loan, and potential borrowers frequently seek out family members or friends to act in this coveted role. That's not to say that all cosigners are eager to sign onto a debt process, but many times, older family members or individuals with a solid job history and good credit will go out on a limb for those who they trust.
- Better interest rates. The main benefit of going with a cosigner for an auto loan is that any credit-challenged driver will automatically receive better interest rates by adding the cosigner, than they would by applying for the loan solo. That's because lenders base interest rates on what kind of a credit risk a borrower may be. For this reason, having a cosigner is very popular with those who have not built up good credit and want to avoid sky-high interest rates on a loan.
- Buying time to build credit. While a first-time driver or other unseasoned borrower pays on their first auto loan with a cosigner, they are building up credit that will help them in the future. Having a cosigner on a loan buys time for a borrower to pursue building a good credit history with credit cards, real estate investments, or anything else where prompt payment can boost a credit score.
- A team project. Another great aspect about using a cosigner on an auto loan is that you have a sympathetic yet motivating voice in the mix. Some less attentive borrowers may not tend to follow through on their own, and the dealer or lender may not be able to get the message through that payments need to be made. A cosigner can help bring this point home to the borrower before the situation gets out of hand, with repo agents, shut offs, or other last resorts.
- Gaining from experience. The cosigner, as someone with a good financial history, solid employment, and good credit, is generally someone who is wise about the ways of the financial world. This means that the cosigner can also provide some good advice at the dealer's lot or while financing with the lender. It's not uncommon for a new driver to get not just better interest rates but also good sound financial advice from a cosigner.
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All of these contribute to the vast amount of younger drivers who seek a cosigner on their first auto loan, rather than choosing to go it alone and risk dealing with high interest rates that can cause a debt to snowball over time.
Disadvantages of Using a Cosigner for a Car Loan
Although having a cosigner can be great for a first-time car buyer with no credit history or an unfortunate case of bad credit, there are some downsides to using a cosigner on an auto loan. While the cosigner can be an asset for a borrower, there are a variety of different ways that this situation can turn sour. Here are some of the dangers of a cosigner's auto loan situation.
- The cosigner is on the hook for the debt. When a borrower and cosigner work together, debt sharing can be a positive experience. In other cases, where an unreliable borrower is able to finagle a cosigner into the equation, the person who cosigns on the loan can be in for a rude awakening when they realize that they are the ones under pressure.
- Other liabilities apply. Another thing that cosigners may not know about, or think about, during the loan application and vehicle buying process, relates to the use of the vehicle over time. In many setups, the cosigner holds the title or is otherwise attached to the vehicle. Insurers will hold a cosigner accountable for claims, and other situations can also have a negative effect on a cosigner who may not be driving a car. That means that their first notice of a crash or claim can be through paperwork from an insurer or other party.
- Potentially different mailboxes. A difference in address can make it very difficult to get accurate notice to both the cosigner and the borrower if payments are late or past due. This provides other problems for the cosigner, who can't know how far behind the borrower is on the debt until it's often too late.
- Cosigning can lead to confusion. If neither party really knows what's in the fine print of an auto document, they may not know how to handle eventual results. Dealers or other financing lenders may slip items into a contract that target a cosigner because that person is more likely to have assets or responsibility for their credit. This helps to secure a loan from the lenders perspective, but it can be a really bad deal for the cosigner.
- Relationships may go south. When financial trouble rears its head on the auto loan, it's common for the cosigner and the borrower to have a difference of opinion. This can strain the family or friend relationships to the point of breaking. That's why it pays to be careful when considering cosigning on an auto loan.
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Potential borrowers and their cosigners should think about these items when they are discussing how it might benefit the borrower to go into an agreement, even with someone who they trust. Assessing the liabilities early will help prevent problems down the road.
Avoid Using a Cosigner for a First Time Car Loan
Acquiring a first time car loan sometimes requires finding a cosigner who will guarantee payments. This puts a somewhat awkward twist on what might be an otherwise excellent relationship. You get all the benefits of car ownership including the reporting of monthly payment activity to the national credit bureaus. However, if you default on payments, your cosigner will be liable. Therefore, it's highly recommended that you avoid using a cosigner if at all possible.
Almost all lenders of first time car loans set a minimum monthly income requirement at $1,600 as a requirement for not needing a cosigner. This translates to $400 per week or $10 per hour paying job. Many first time buyers may find this a difficult requirement to meet, but the good news is you'll need just 6 month's income history. Therefore, obtaining a part-time job for a short period of time may be the only alternative you have for meeting this requirement.
The typical down payment most lenders look for is 20%. This establishes the fact that you have an equity interest in the loan since the car acts as secured collateral. Placing a sizable down payment will relieve the need for a cosigner while decreasing the lender's at risk position. Additionally, a higher down payment decreases the amount of monthly payments needed, thus allowing for a higher value car to be purchased or easily affordable installments that no cosigner will need to guarantee.
Most lenders prefer a year of established credit to waive the need for a cosigner. This will allow the lender a significant length of time to assess your payment abilities. Through maintaining a year of on-time payments while staying under 50%of your spending limits, you will not only provide a history of "excellent" payment activity but help establish a credit score that also determines a cosigner waiver. Although a 650 credit score is desirable for any loan, first time car loans may require a score of 680 or higher to waive any co-signer requirements.
A few other requirements fall into the "6 months" category where lenders of first time car loans look for stable work and resident requirements. Although these lenders stipulate a minimum at work time for 6 months on the job and 6 months at the same residence, 1 year on the same job is highly favorable if you find a need to move during this time period. However, jumping from job to job in a year prior to applying for a loan will usually end up with a co-signer requirement even if you've maintained 1 job for that year.
Keep in mind that using a cosigner for a first time car loan will put that person at financial risk if you even make late payments. Finance companies will not only contact you about payments being late but also will contact your cosigner who will always be up-to-date on your payment activity. Some first time loan lenders will send monthly statements to your cosigner keeping them informed.
If You Must Use a Cosigner for a First Time Car Loan
Getting a first time car loan can be an uphill battle without a credit history, so having someone cosign with you might be worth the aforementioned drawbacks. If you have never had a car loan, or if you have never had credit in your name before, then financing the purchase of a first time car loan may be difficult as well as problematic. Still, there are numerous ways that you can get around this lack of credit history, including working with a cosigner that has enough credit to help boost your creditworthiness.
First Time Car Loan Lenders
There are lenders out there that specifically cater to people with no credit, or people who have never had a car loan before. If you are applying for your first car loan and you have no credit history to speak of, then you should skip financing from the dealership and start looking for sub prime auto lenders online or in your local area.
Sub prime lenders are capable of offering a variety of loans that accommodate all different types of credit and lending histories. If your history of credit is poor or if you have never purchased a car before, you can still get approved easily for your first time car loan. The auto loans that are offered to people with poor credit, no credit or no car loan history are still relatively reasonable, and they generally offer lower rates than what you would receive if you worked with a dealership to obtain your first time car loan.
Work with a Cosigner
Establishing a strong history of credit so that you can take out a first time car loan is something that takes time and serious effort. If you are eager to acquire your first time car loan, but you want to secure the lowest possible rate, then you may want to consider working with a cosigner. The purpose of a cosigner is to have someone with a higher credit score than you sign your loan application with you.
Your credit and his or her credit would be combined, raising the credit score for the application and improving your chances of securing a low interest first time car loan. As the primary purchaser of the car, you will still be the individual responsible for making the loan payments. Keep in mind that the cosigner or cosigners will become responsible for your loan payments if you do not make your payments on time.
Getting First Time Auto Loans
If you are serious about securing a first time car loan, you should try to raise your own credit and to work with a cosigner. When you combine both of these endeavors, what you may end up with is a lower interest rate than what you expected. Keep in mind that putting a down payment on your automobile is another way to lower your interest rate and increase your chances of first time car loan approval.