Auto Loans

How Cosigning a Car Loan Works

Cosigning a car loan for a friend or loved one means helping someone who otherwise probably wouldn’t be approved for auto financing. If all goes well and they make their payments on time and in full, your signature and time is all you’re spending. If they don’t? You could jeopardize your credit and be held responsible for the debt. There are alternatives, as well as ways to mitigate your risks if you do decide to become a cosigner for a car.

How much does a cosigner help on auto loans?

A strong cosigner not only has the power to turn a rejection into an approval, but may help improve the terms a borrower receives on their auto loan. A lower interest rate can mean saving thousands of dollars over the life of a car loan that may stretch for five years or more.

You might be helping a child or grandchild who doesn’t have a significant credit history of their own buy their first car. A friend who has damaged credit may want to avoid bad credit car loans, or they have a bankruptcy or another event in their past that could make approval difficult.

Cosigning a car loan vs. joint auto loans

It’s important to understand that cosigning a car loan is different from a joint auto loan you might take out with a spouse. Cosigning means you bear all of the same responsibilities as the borrower, but typically without expectation of any of the benefits of car ownership. A lender might not differentiate between the two. Ownership rights would come down to whose name is on the vehicle title — we’ll talk more about that in the FAQs section.

When two people apply for a cosigned auto loan, joint auto loan or joint car refinance, lenders consider both applicants in deciding whether to offer an auto loan and at what rate. Each person must provide the same type of documentation and personal details, such as contact information, Social Security numbers and income amounts. With a cosigned loan, the cosigner’s credit will most likely carry greater weight than that of the main borrower.

How does cosigning for a car work?

First, it’s important to weigh the pros and cons of auto loan cosigning. If you cosign a loan after deciding it’s worth the risk, the mechanics of cosigning are straightforward: Add your name to a friend or relative’s auto loan application. It may be possible to do this digitally and cosign a car loan from another state, but it will likely be easier in person.

This process is relatively simple, but there are several steps you can and should take to make sure you’re protected and that you and your loved one are getting their best deal possible.

Step 1: Check your credit score

A strong credit score is key to being a strong cosigner — if your credit isn’t where you thought it was and may not benefit a friend’s application, it’s time to rethink the arrangement. You can check your score here.

Step 2: Sign for YOUR best auto loan possible

The hope is that you’ll never have to pay a dime as the cosigner for a car, but you still want to make sure it’s a loan for your best rate and term possible. One of the best ways to do this is by comparing loan offers before going to the dealership.

Read the fine print of any loan offer carefully before you or the borrower signs it and make sure you receive a copy afterward. The lender should also provide you with written notice of your cosigner obligations in case of default.

Step 3: Ask the lender to notify you of default

The sooner you’re aware of any problems with the auto loan, the faster you can respond, possibly avoiding late fees or other penalties. Another way to stay informed is to request duplicate auto loan statements or by gaining online access to the account. These may be steps the borrower must take, but they’re conditions you can set from the beginning.

Step 4: In case of trouble, ask about a cosigner release

Car loans can last for years, as long as 84 months or even more. Perhaps you’re no longer friends with the person you cosigned for a car, or you’re no longer in a position to pay should the worst happen and you must take responsibility for an auto loan in default. In some cases, the lender may release you and pursue the borrower if the lender deems them able to pay.

Alternatives to cosigning a car loan

Cosigning a car loan isn’t the only way to help a friend or relative in need — it is still possible to be generous while also limiting your financial consequences.

Finance a car and allow the other person to use it

The most common example of this is a parent financing a car for their child. Note that whenever someone regularly drives a vehicle you own, you’ll need to add them as a driver to your auto insurance.

The advantage in this scenario is no surprises — you receive the auto loan statements — but you’re also making the payments, unless you set up a family loan agreement (more on family loans in a minute).

Give a car to the other person

In order to gift a vehicle, you must own it free and clear, with no liens. This could be an ideal arrangement if you had a secondhand car you’re not using. By giving it away, a sibling, child or grandchild not only gets a car, but may only pay nominal sales tax or none at all. In Texas, for example, the person receiving the vehicle pays a $10 gift tax, a steal compared to the thousands you might pay in fees when buying from a dealer. It would then be up to the new owner to register the vehicle according to their state’s rules.

It’s important to check your state’s tax laws — some states may not provide a sales tax exemption to grandchildren, for example, but only children or stepchildren.

Provide a car loan to the other person

If you own a vehicle and want to sell it, you could be the financier yourself. The other person would make monthly payments to you until the loan is paid off. The biggest risk here is the possibility that the borrower defaults; however, unlike cosigning a car loan, your credit wouldn’t be at risk. Lending money to family members or friends has its own risks and rewards.

Limitations on financing a car for another person

A friend or relative may ask you to “take over” a car loan, but this isn’t technically possible. You could make someone else’s car payment for them. Or, your friend could refinance their car loan into your name, essentially replacing their existing loan with your new one. But if a friend simply wants to get rid of a car, a car you’d be interested in buying, it would be easier for them to sell the car to you.

FAQs about cosigning

What does it mean to cosign a loan?

When you cosign for a car loan, you agree to be financially responsible for the loan. In the best case scenario, the other person pays off the loan on time and both of your credit scores increase. In the worst case scenario, you will need to pay off the loan and/or your credit will suffer.

What rights does a cosigner have on a car loan?

A cosigner typically doesn’t have an ownership interest in the property the loan is being used to purchase. However, if both names are on the car title, both people have ownership rights to the vehicle. In North Carolina, for example, a cosigner would be automatically added to a vehicle title in that state, according to a Department of Motor Vehicles spokesperson. In other instances, the borrower would need to request that a cosigner be added to the title.

Can I cosign if I already have a car loan?

Yes, you can likely cosign for another car loan if you already have one. However, it’s a good idea to keep an eye on your debt-to-income ratio, especially if you were planning to make a large purchase, like taking out a home loan. A mortgage lender would look at all of your debt obligations when making a decision on your application.

Cosigning a car lease: Is it possible?

Yes, it is possible to cosign for a car lease.

Does cosigning affect credit scores?

Cosigning does show up on your credit report. Whether the payments are made on time and in full will affect your credit score as a cosigner.

 

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