Should I Get a Cosigner for an Auto Loan?

Whether you’re shopping for a reliable used car or upgrading the family minivan, it’s important to find the right financing option when buying a vehicle. But qualifying for an auto loan may not be easy if you’ve just started your credit journey or are working on rebuilding your credit. If you’re having trouble getting an auto loan with terms that work for you, you might consider adding a qualified cosigner to your application. However, cosigners take on a lot of responsibility, so it’s important to understand what a cosigner does before asking someone to back your auto loan.

What is a cosigner?

A cosigner is someone who agrees to sign a loan agreement with you, the primary borrower. Your cosigner is responsible for covering any payments you miss on the loan. If you default on your loan, meaning if you don’t pay it back, the cosigner becomes legally responsible for all remaining payments and fees.

A cosigner isn’t a co-borrower. Co-borrowers share ownership of the vehicle that the auto loan finances and are equally responsible for repayment of the loan. Cosigners don’t have ownership rights over the vehicle.¹ However, the cosigner is equally responsible for payments if you, as the borrower, fall behind or default on the loan.

You can ask anyone you know or trust to be a cosigner. But many lenders, including OneMain, have rules about who can qualify as a cosigner — and some lenders don’t allow cosigners at all. Check with your lender to determine whether your loan is eligible for a cosigner.

A cosigner with a strong credit history may help you qualify for an auto loan if you’re having trouble getting approved. Even if you qualify for an auto loan on your own, a highly qualified cosigner may increase your borrowing power or help you get a lower interest rate.² If approved, both you and the cosigner must sign the loan agreement documents and confirm that you understand the terms.

When might you need a cosigner to buy a car?

You might want a cosigner to strengthen your auto loan application if any of the following apply to you:

• You have limited credit. Lenders use your credit history to estimate how likely you are to repay debts. If you’ve never used credit or have only limited experience with credit, lenders may be less likely to offer you an auto loan.
• You have less favorable credit. You may not qualify for an auto loan with a favorable term unless you have a strong credit score. A cosigner’s credit history, along with your own, may help you qualify.
• You have a high debt-to-income (DTI) ratio. Your DTI ratio is the sum of all your outstanding debts compared to your gross monthly income, the money you have coming in before taxes. Auto loan lenders often look for a DTI below 35%. If you have a higher DTI, lenders may choose not to approve you for an auto loan.
• You’ve been turned down for an auto loan. If your loan application has been denied, applying for another loan with a cosigner may help you access the funds you need.

Pros and cons of using a cosigner for an auto loan

Adding a cosigner to your auto loan application may improve your approval odds, but it’s not without risks for you and your cosigner. Before you take the next step, carefully weigh the potential pros and cons.

Pros

• May increase approval chances: If factors like your credit history or income don’t meet a lender’s requirements, a qualified cosigner might help you get an auto loan.
• May help you qualify for better rates or a bigger loan: Even with less-than-perfect credit or a high DTI, you may still qualify for an auto loan. But lenders may charge you a higher interest rate to offset their perceived risk. A cosigner may help you qualify for a lower interest rate or a higher loan amount.
• May help both you and your cosigner build credit history: An auto loan that a cosigner helps you access may help you build credit history if you pay on time. The auto loan may help your cosigner build credit history by adding to their positive payment history and credit mix.³

Cons

• Increases the cosigner’s DTI ratio: The auto loan will appear on the cosigner’s credit report and increase the cosigner’s overall debt, which may make it harder for them to qualify for credit in the future.
• May impact both credit scores: Payment history on the auto loan will appear on both the primary borrower’s and the cosigner’s credit reports. If you miss a payment, it will affect your cosigner’s credit score as well as your own.
• May affect your personal relationship: Money is often a sensitive subject, even among close friends or family members. Disagreements or challenges related to your auto loan may put a strain on your personal relationship with the cosigner. It’s vital to communicate every step of the way.

Questions to consider before asking someone to cosign your auto loan

Getting a cosigner for your auto loan is a major decision. Before asking someone to cosign your auto loan, ask yourself the following questions to determine whether it’s the right choice for you.

Can you make on-time loan payments?

A cosigner may help you qualify for a larger loan amount than you’d receive on your own. But as the primary borrower, it’s your responsibility to manage the monthly payments. A higher loan amount can mean a higher monthly payment, depending on the loan term and interest rate.

Before you apply, consider calculating the car payment you could realistically afford each month without cutting into other necessities. Share that amount with your potential cosigner so you can both make informed borrowing decisions. If your application is approved, be sure the monthly payment fits into your budget.

If you don’t have room in your budget for any additional bills, you may want to consider whether any alternatives to buying a car, such as carpooling, borrowing a car, taking rideshare services or using public transit, may be available and temporarily meet your needs until you’re able to get a loan.

Does your cosigner fully understand the risk?

Cosigners take on considerable risk and responsibility. Whether you choose a friend, partner or family member to cosign your loan, make sure they fully understand the risk.

The person who cosigns your auto loan is equally on the hook for repaying the loan if you default. That means lenders and debt collection agencies may sue the cosigner to collect unpaid debts.⁴ In some states, lenders may try to collect missed payments from the cosigner before the primary borrower.⁵ Check the guidelines in your state before asking someone to cosign.

Even if you’re confident you won’t default, make sure your cosigner has the resources to afford monthly loan payments, just in case. Your cosigner should only move forward with the process if they’re comfortable with the risks.

Can your relationship withstand financial stress?

Before asking a family member or friend to cosign your auto loan, consider whether both of you are comfortable with the financial responsibility and potential impact on your relationship. It’s always difficult to mix relationships and money. Any disagreements about the loan could cause tension between you, the cosigner and other friends and family.

Even if you don’t anticipate any hiccups, it’s worth discussing potential issues with your cosigner. What if you miss a payment and that causes damage the cosigner’s credit score or you lose your job and leave the cosigner on the hook for the rest of the loan’s term? If there’s a risk that the arrangement could harm your relationship, you may want to consider alternatives before moving forward.

Alternatives to cosigners

A cosigner may not be your only option for getting an auto loan. Some alternatives may help you qualify.

Offer a larger down payment

Experts recommend offering at least 20% of the car’s cost upfront, if possible. Even if you can’t cover 20%, boosting your down payment may make it easier to get the loan you want. If you have the money, offering a bigger down payment may improve your approval odds, help you qualify for a lower interest rate and reduce your monthly payment.⁶

Explore a different lender

If a lender declines your auto loan application, it doesn’t mean you won’t qualify anywhere else. You may be able to get an auto loan from a dealership, bank, credit union or another lender.⁷ Before you submit an application, check for prequalified offers. A prequalified offer shows the kind of loan terms you’re likely to qualify for based on a soft credit pull, which doesn’t affect your credit score. Applying may temporarily affect your credit score but checking for prequalified offers won’t.

Improve your credit score before applying

If you don’t need a new car right away, consider working on improving your credit score before you apply for a loan. With a stronger credit score, you may qualify for a wider range of loans with more favorable rates and terms.

Some strategies that could help you improve your credit score may include paying down your existing debts to reduce your credit usage and paying all your loan and credit card bills on time each month. Before you apply for an auto loan, check your credit score to see where you stand.

Consider a more affordable vehicle

A vehicle that meets your needs at a lower price may be a better fit if you find it challenging to qualify for an auto loan on your own right now. Lenders may consider smaller loans less risky, especially if you have limited income. Plus it’s easier to provide a significant down payment on a less expensive car.

Tips for managing a loan with a cosigner

If a friend or family member agrees to cosign your auto loan, consider the following practices to protect yourself, the cosigner and your relationship.

• Set up automatic payments or reminders. Missing a payment may have serious consequences. Automatic payments and payment reminders can help you stay on top of your bills.
• Maintain open, honest communication. You and your cosigner should check in often about your repayment progress, identify any issues right away and work together on solutions.
• Share monthly payment confirmations. Forward your payment confirmations to your cosigner so they know you’re up to date.
• Have a backup plan in case you lose income. Even if you’re prepared to repay the loan, your financial situation may change in a matter of moments. Whether you intend to borrow from another friend or family member, ask the cosigner to pay or release the cosigner from the loan agreement, you should have a plan for managing your debt if your finances change.
• Understand the release process. You and your cosigner should both understand how you can release the cosigner from the loan if necessary. Release processes may vary by lender. Some don’t allow cosigners to get out of an auto loan.⁸

---

---

Pump the brakes and weigh the risks

A cosigner may help you qualify for an auto loan, but cosigning is a serious financial commitment. Before you ask someone to take the leap, assess the advantages and drawbacks carefully. Speak honestly and openly with your potential cosigner about their risks, your financial situation, potential repayment plans and the consequences of defaulting on the loan. Finally, consider whether an auto loan with a cosigner brings you closer to your financial goals.

Sources

1, 2. https://www.nerdwallet.com/article/loans/auto-loans/cosigner-vs-coborrower
3. www.nerdwallet.com/article/loans/personal-loans/co-signing-a-loan
4. www.experian.com/blogs/ask-experian/what-to-do-if-you-cosign-and-someone-defaults
5. https://consumer.ftc.gov/articles/cosigning-loan-faqs
6. https://www.bankrate.com/loans/auto-loans/car-loan-down-payment-benefits/
7. https://www.bankrate.com/loans/auto-loans/what-is-an-auto-loan/
8. https://www.bankrate.com/loans/personal-loans/im-a-loan-co-signer-what-are-my-rights/