One way to bypass the challenges of bad credit auto financing is to enlist a family member or trusted friend to cosign on the loan with you. Admitting your bad credit in conversation, however, can be embarrassing if your potential cosigner is not aware of the challenges you're facing and you likely want to avoid asking for help at all costs. To help you decide if it's worth finding a cosigner, we'll cover the scenarios where it's the best option, the responsibilities a cosigner takes on, and some alternative routes.
Who Should Enlist a Cosigner?
The hard truth is that some car shoppers will find it difficult, if not impossible, to buy a car without a cosigner. One group that often runs into this challenge is buyers with no credit built up. In the case of young adults who have not held a job for a long time nor had time to build credit, a cosigner such as a parent or other close family member can make a car purchase possible. First-time car buyers without a cosigner run the risk of loan rejection because lenders don't have confidence that they will be able to make payments consistently without proof of responsible financial behavior.
In addition to the roadblock of no credit history, some car shoppers with compromised credit will require a cosigner for auto loan approval. A subprime credit score, especially due to missed loan payments acts as a red flag for lenders. Even if your car loan application is approved, the loan will come with very high interest rates which mitigate the risk for the lender but add up to hundreds or thousands of extra dollars over the course of the loan.
For car shoppers that fall into one of the two credit categories above, a cosigner can dramatically improve the odds of car loan approval with interest rates that are more in line with the average. Bringing along a cosigner with good credit and a solid income provides a backup in case you miss any payments. This gives your auto lender the confidence needed to approve your loan application.
What Will be Required of your Cosigner?
Before you have a conversation with a potential cosigner, it's important to understand the requirements so you're prepared to answer his or her questions. The first set of requirements involve the car loan application process. In some cases, your cosigner may be required to go with you when you apply for your car loan and cosign in person. They must also have a good credit score in order to improve your chances of getting the loan offer. Typically, a credit score of 700 or higher will qualify a cosigner as having good credit. Your cosigner should also be prepared for the lender to look at their income and employment to determine approval and loan terms.
Once they are on board for the first set of requirements, your potential cosigner should understand their responsibility in the event that you can't make your car payments (not the easiest part of the conversation). The cosigner may be required to cover one or two late payments or even the full loan amount if you stop paying entirely. Your cosigner won't have any legal ownership of the car but the lender sees them as a reliable way to get paid if you're not keeping up.
Not every car buyer will have someone willing to take on the cosigner responsibilities listed above, but that doesn't mean all hope is lost. Even car shoppers with compromised credit or first-time car buyers may be able to successfully secure auto financing. First-time car shoppers who have managed to build up their credit and have proven they can make on-time payments like student loans or credit card bills won't necessarily need a parent to co-sign for them.
For shoppers with poor credit, a substantial down payment can be an alternative to a cosigner for car loan approval and lower interest rates. A down payment not only reduces the overall amount financed, but it also gives the lender more confidence that the car buyer has the ability to make payments. The recommended down payment for a new car is 20% of the vehicle price and 10% for a used car. Finally, shopping around for car loan pre-approval from multiple sources such as credit unions and online subprime lenders can also help shoppers with bad credit get approved without a cosigner.