Who needs a co-signer for a car loan? How does it work?

need a co-signer for car loanNew or first-time car buyers are often surprised at being turned down for a car loan because they have no credit history, which unfortunately has about the same effect as having bad credit. Getting a co-signer might be the answer.

Lenders want to see that a borrower has a good record with previous loans and credit cards. Without a history of credit, a borrower represents a risk to lenders. If they don’t know a borrower’s history, they take the low road and assume the worst.

It’s a familiar “catch-22″ situation in that you can’t get a loan to establish credit without already having credit. So what is the answer?

What is the answer?

The most common solution is to have someone “co-sign” your loan contract with you — both names and signatures on the contract. Typically, it’s family member who has a good credit score. A co-signer plays no part in the loan unless the primary borrower (you) fails to make payments. In that case, the loan company would have the right to seek payment from the co-signer.

A co-signer does not share ownership of your vehicle. If you pay off your loan on time and without problems, the co-signer has no further role, rights, or responsibilities. Their job is finished.

Even if you default (fail to pay) on your loan and the co-signer has to step in and make payments, he/she still has no owership rights. The car would still be in your name. Many people who co-sign do not understand this important point.

Even with bad credit you may still be able to get a car loan from an online lender such as Auto Credit Express
that specializes in providing loans to credit-challenged people, and without a co-signer.

Another point that is important for co-signers to understand is that a co-signed loan or lease shows up on both the borrower’s credit report and the co-signer’s as a financial obligation or debt. This may affect the co-signer’s ability to get a new loan, home mortgage, or lease for themselves if they are already close to being over-borrowed. It increases their “debt load” which is a factor that is considered when one applies for new credit. Both you and your co-signer should know your credit score before you apply for a car loan.

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However, on the postive side, if you pay off your loan with no problems, both you and the co-signer benefit from the good credit report. Both will improve your credit scores. This makes having a co-signer a great way for someone with no credit to begin building a good credit history.

Selecting a co-signer

You should take care in selecting a co-signer. Since approval of your loan will depend on their credit worthiness, the person should have a strong and healthy credit history, a steady source of income, and not have excessive debt. For most new car buyers, this will probably be a close family member.

If you have already shown a history of financial irresponsibility, you may have difficulty finding someone who is willing to assume responsibility for your new obligations. Like the banks or loan companies, your potential co-signers may not want to take on the added responsibility and credit debt load. If the co-signer is not able to take over payment when the primary borrower defaults, both the borrower’s and the co-signer’s credit are damaged for up to 7 years.

Warning about co-signers

Anyone who is going to use a co-signer for their auto loan is usually listed as “primary” on the loan and the co-signer is “secondary.”

The primary signer is the one buying the car and who will own the car when the loan has been paid off. The car’s title is in the primary’s name.

But here’s something to watch out for: If the person buying the car doesn’t have sufficient income to make payments, or has excessive debt, a dealer may switch primary and secondary signers on the loan contract, and “forget” to mention it.

This means the person who thinks he’s buying the car could possibly end up being the co-signer and a non-owner, and the person who thought they were co-signing becomes the primary buyer and owner of the car, regardless of who actually makes the payments. In some cases, the person who assumes they are the primary may not appear on the contract at all. Watch out for this situation before you sign your contract. Otherwise, it’ll be too late to change it or cancel the deal.

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Just to be clear, there are two important factors in being approved for a car loan: good credit, and a good steady full-time job with sufficient income. A co-signer can help with the credit requirement, but cannot help with the job/income requirement. This is a point that is frequently misunderstood.

If you can’t find a co-signer

If you can’t find someone who will co-sign for you, you have few other options. You may have to work out your transportation needs another way while you save enough cash to get started with an inexpensive used car, while separately building your credit history so that you won’t need a co-signer the next time. Get a couple of credit cards or department store cards, use them often, and pay them off each month.

You could also borrow cash from friends or family, although this method doesn’t help you build credit. In many cases, you may not need to borrow the entire amount to buy your car. Often, a large down payment will allow you get a loan even with no credit or bad credit. A smaller loan presents less risk to a lender, and could allow you to be approved.

You could also try a used car dealer who specializes in working with people with bad credit, known as “buy here pay here” dealers who finance their own loans, which means it won’t help — or hurt — your credit. Just know that this kind of dealer usually sells overpriced older vehicles at very high loan interest rates.


Getting a co-signer is a great way to start building your own credit history. If you make your payments on time, don’t skip payments, and don’t default on your loan, you’ll be in great shape for your next loan — without a co-signer.

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