If you are a first time borrower or have bad credit, you may find yourself needing a cosigner in order to get the car loan that you need. If so, you may be wondering what exactly does a cosigner do for your car loan?
Why You Need A Cosigner
There are three predictable situations under which a lender will require you to have a cosigner:
- Your first loan
- You have bad credit
- Your income is insufficient/can’t be verified.
In the first situation, you simply have not built a credit history, so lenders are worried about the risk associated with the unknown.
In the second scenario, lenders know that you have a habit of being irresponsible with debt or have had income problems (unemployment, etc). Again, lenders are wary of the risk involved with offering you a loan.
Lastly, lenders require a monthly gross income of at least $1,400. While some will consider $1,250, if you do not meet a lenders income requirements, your loan will either be denied outright or you will need to have a cosigner to secure the loan. Also, a lender must be able to verify your income, if they cannot, then you will need a cosigner.
So, as you can see, a cosigner serves as a buffer in high-risk lending scenarios.
Who Can Be Your Cosigner
Every lender has its own set of guidelines regarding a cosigner, but some of the general ones include the following. Your cosigner can be a friend or relative. How you know them does not matter, but their credit history does. They must have a credit score above 640 in most cases. They must have a debt-to-income ratio of less than 40 percent, including the payment for the loan they are cosigning for and they must meet all income requirements that your chosen lender may have.
What A Cosigner Does
A cosigner imparts their good credit habits to your loan application, easing the lenders risk factors in several ways. First, having a cosigner gives a lender someone to collect their money from if you do not repay the loan as agreed. When they sign the loan paperwork, a cosigner is agreeing to pay the debt if you do not. They are also agreeing to cooperate if repossession becomes necessary. A cosigner also offers the lender two people to try to garnish wages from in order to recoup any losses from a repossession. As you can see, you are putting a cosigner’s credit history at risk. You need to be sure that you can repay a cosigned loan or you risk losing a friend or the support of family members.