If you have a poor credit history or little credit history at all, you are going to have a hard time finding an auto loan with favorable terms. Low-interest rates are almost exclusively given out to borrowers who have stellar credit ratings. With a bad credit history you could end up paying 10 percent or more in interest on your auto loan–that is more than twice the industry average! One solution you may have considered is getting a friend or family member to cosign on the loan. We will look at what the benefits of having a cosigner are and what the drawbacks are as well.
Getting Your First Auto Loan
Cosigning on a loan is something that is most common when it comes to young people who need their first loan. A person who has no credit history is going to have a difficult time getting a car loan from a bank or even a dealership. While it may be possible to get a loan that has high-interest rates, the last thing most young people want when they are just starting out on building their credit history is a loan with large monthly payments that they are more likely to default on.
While young people can build up their credit in other ways, doing so takes time and isn’t really an option for those who need a car right away. In such a situation it is very common for the borrower’s parent to cosign on the loan. The cosigner provides a guarantee that even if the young borrower misses a payment or defaults on the loan that the cosigner will still be held liable for the loan (i.e., the lender can come after the parent for payment).
Typically the parent with the better credit rating would be the cosigner. By getting a cosigner, a young person with no credit history can still get a loan with low-interest payments since the lender has the security of knowing that the cosigner who has a good credit history will be there to make payments that the young borrower may miss.
Lowering Car Loan Payments
It’s not just young borrowers who get cosigners, however. Anybody who has a poor credit rating may want to reach out to a friend or family member and ask them to be a cosigner. A cosigner who has an excellent credit rating can help those who have a poor credit rating shop around for a competitive car loan that has low-interest payments. Compare different loans and find one with the best terms and conditions.
A loan with a low-interest rate is one that will cost a lot less over time and may even be cheaper month by month depending on the term of the loan. This solution is ideal for people who have gone through some tough financial times, such as a divorce or job loss, but now have a handle on their situation.
A Word of Caution
However, keep in mind that a cosigner is not a shortcut to getting a larger loan than you would otherwise be able to take on. Even if you have a cosigner, you still need to ensure that you can afford the loan that you are taking out. If you are only using a cosigner to get a bigger loan then you may want to consider downsizing instead. For example, if you are looking for an SUV and need a $30,000 loan then ask yourself whether a compact car, which is just as reliable and will cost much less, might be a better, more practical option.
If you miss a payment on your loan then your credit rating will suffer.
Furthermore, your cosigner’s credit rating could also take a hit. In extreme cases, cosigners have even had their own property repossessed because it was put up as collateral when initially signing the loan. Needless to say, if your cosigner begins to suffer financial harm because you have failed to make payments on time then that relationship is going to come under a lot of strain.
Do up a budget beforehand and make sure you know what your monthly payments are going to be. If you don’t have a stable job that allows you to make those payments then you should probably not be taking out any major loans at this time.
Getting a cosigner is a great way to help you get a better deal on a car loan. However, you need to be aware of what the risks of cosigning on a loan are, both for you and for your cosigner. That way you can get the loan that works best for your particular circumstances.
