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How Much Does a Cosigner Help on Auto Loans?

A word cloud featuring the word 'cosigner'Auto loan cosigner

Let's say you have experienced a financial turnaround for the better. You are now able to take a car loan for your favorite vehicle at the average interest rate. After finalizing the dealership, you eventually apply for the car loan. However, the lender declines the average rate to you after pulling your credit report with abysmal performance and offers a subprime loan. The lender may still offer you average interest rates, but at a condition, i.e., get a cosigner.

A cosigner is a person that guarantees the loan payment by agreeing that they will step in and pay and if the actual borrower defaults and is not able to pay. In other words, the cosigner backs the loans and reassures the lender that they will get their loan amount back. It is essential to mention here that a cosigner's role is more than just a character reference for the borrower. A cosigner essentially lends their good credit history and dependable financial profile to the borrower.

How much does a cosigner help with auto loans? What are the instances when you will need a cosigner? What are the upsides and downsides of getting a cosigner on board? We will try to answer all these questions in this post.

Cosigner's Help on Auto Loan: An Example

The cosigner's role is to help you get a car loan on desirable terms. However, many people don't fully understand how having a cosigner is not just about qualifying for a car loan. A cosigner's role goes a long way to save you thousands of dollars when you use car financing with not so great credit profile. Let's try to understand how much does a cosigner help on auto loans in numbers.

The average price of a new vehicle in the US is around $36,800. On the other hand, the average interest rate on a car loan for a 60-month repayment plan is 5.27% (the rates will be different on used car financing). Let's say you apply for a car loan for these average figures. If you qualify for this loan offer, you will have to pay $5,141 in interest on the principal amount with a 5-year (60-month) repayment.

But let's suppose you are struggling with bad credit, and the lender declines you the car loan on average interest rates. Their revised loan offer for you is subprime at a whopping 11% interest. You will have to pay $11,207 on top of the principal amount for the same car and the same repayment term.

For the above scenario, if you manage to get a cosigner to qualify for the average interest rate, you will save $6,066. So besides protecting you from the exhaustion of finding reasonable interest loan rates for bad credit, they will also save a huge sum of money across the repayment phase.

Instances When You Might Need a Cosigner

Besides bad credit score and negative information on credit reports, a lender can decline your car loans at prime interest rates for a range of other reasons as well. Let's look at all those instances when you may need a cosigner to back your loan request.

Inadequate Credit: A lender can decline a car loan request if the applicant hasn't established sufficient credit. To compensate for the insufficient credit, the lender may require you to bring in a cosigner that has a substantial credit built in their name.

History of Employment: Lenders also factor in the history of employment of the applicant. If your professional track record is unstable (lots of job switching) or very short, a lender may not consider you eligible for average loan rates without a cosigner.

Debt-to-Income Ratio: Your monthly income stream will also determine whether you will need a cosigner to get around subprime loan rates. If a lender considers your debt-to-income rate too high, they might ask you to bring a cosigner.

Who Can Be a Cosigner and What They Have to Do?

Legally, any person can become a cosigner. Usually, it is close family members and friends that take on this critical responsibility. You can also find professional third-party cosigners. However, it is better to avoid using their services because most of them work with dubious terms and conditions and also act like a loan shark in case you default.

It is always better to request cosigning, where you have mutual respect and trust with the person. The cosigner must decide if they fully understand the borrower's financial state and be confident about the borrower's ability to repay the car loan on pre-agreed terms.

A cosigner usually has to fill out a form and independently submit it to the lender. They will also have to show the proof of income, provide SSN and driver's license, and verify their residential and office addresses.

Upsides and Downsides of Getting a Cosigner On Board

Before we wrap up the post, it is imperative to give you a quick yet complete overview of the upsides and downsides of having a cosigner on board while applying for a car loan.

Upsides of Having a Cosigner

  • The first and foremost benefit of having a cosigner is that having one saves you from the exhausting search of good auto interest rates. With a cosigner on your side, you can easily sign up for the car loan of your choice.
  • Your loan application is processed quickly without too much back and forth when a cosigner is on your side.
  • When you have a cosigner's backing, you can build your credit for a better score by making affordable monthly on-time payments. You don't get this opportunity when you don't have any other option besides opting for a subprime loan.
  • When you have a cosigner on board, you can't afford to develop a laidback attitude towards the payment schedule. The fear of spoiling your relationship with the cosigner pushes you to remain diligent and on top of your repayment game.
  • Last but not least, you manage to qualify for lower interest rates. Lower interest rates don't just streamline your monthly payments but also save you thousands of dollars by the end of your repayment term.

Downsides of Having a Cosigner

  • You put the financial wellbeing of your closed ones in jeopardy. For instance, the nonpayment by you can mess up the credit report of the cosigner. They can also be penalized and sued in case you default and they are not able to pay for you either.
  • The reasons mentioned above can cause irrevocable damage to your relationship with them.
  • In many cases, cosigners interfere in the decision-making of borrowers. They might dictate and push you to pick the car model and loan term of their choice in exchange for lending their credit history and financial support to you.

A cosigner can undeniably help you with auto loans. However, it is a tricky rope to tread for the primary borrower. They need to be 100% honest with the cosigner about their financial condition to make a better decision. Also, only ask for someone to cosign a car loan when you are more than 100% confident that your current and future income can comply with the loan requirements.

Visit if you are seeking good interest rates with bad credit but without a cosigner. You can also CarLoans to dig details on current car loan rates, used car financing, touchless car loans, online car loans, and used car loans.