Who needs a co-signer for a car loan?
New or first-time car buyers are often surprised at being turned down for a car loan because they have no credit history, which has about the same effect as having bad credit. 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.
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. Typicallly, it’s family member who has a good credit score. A co-signer plays no part in the loan unless the primary borrower 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 responsiblity. Their job is finished.
Even if you default on your loan and the co-signer has to step in and make payments, he/she still no owership rights. The car would still be in your name. Many people who co-sign do not understand this important point.
Another point 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 or lease for themselves. It increases their “debt load” which is a factor that is considered when one applies for new credit.
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 score are damaged.
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 transporation needs another way while you save enough money to get started with an inexpensive used car, while building your credit history so that you won’t need a co-signer the next time.
You could also try a used car dealer who specializes in working with people with bad credit, such as Drivetime.com. They have 78 locations around the country and offer a wide selection of used cars.
Summary
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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