Imagine you’re shopping for a new car and finally find a reasonably priced set of wheels that you like. But when the dealer pulls your credit, that seemingly affordable monthly payment is no longer available to you. Instead, you’re offered a subprime car loan at 10% or even 20% interest because your credit isn’t strong enough to get a better rate.
How much does a cosigner help on auto loans when you’re facing this type of situation? Get more information below to help you decide whether seeking a cosigner is the right option for you.
A cosigner is basically someone who backs the loan. They sign agreeing that if you don’t make the payments as promised, they will step in to pay them.
If you don’t have much of a credit history or your credit is bad or poor, lenders are typically hesitant to give you an auto loan. They perceive you as risky. Will you pay as agreed? There’s not enough data or credit history for them to make that call.
However, a cosigner with a long history of good credit is different. The lender is more likely to believe that this person willpay as agreed. So, if you can get a cosigner to back you, you might have a better chance of getting a loan or getting better terms.
How much can you save? Imagine you finance $37,851, the average price for a new light vehicle in the United States as of February 2020.
The average interest rate as of the end of 2019 for new car loans was 5.76%. If you’re able to get that interest rate and a loan term of 72 monthsâthat’s 6 yearsâyou would pay a total of $44,742. That’s $6,891 in interest and a monthly payment of around $621.
If you financed at 10% without a cosigner for the same terms, you’d pay a total of $50,488 for the vehicle. That’s $12,637 in interest and around $701 in monthly payments.
This is obviously just an example, but you can see that a cosigner can save you a lot. In this case, it’s $80 a month and more than $5,700 total.
It’s important to note that having a cosigner for a car loan is not the same thing as having a co-applicant. A co-applicant buys the vehicle with you. Their credit history and income are used alongside yours to determine if you, together, can afford the vehicle. The co-applicant also has an equal share of ownership in the vehicle purchased with the loan.
A cosigner, on the other hand, doesn’t have an ownership share in the vehicle. Their income may also not be a factor in the approval. Typically, they’re along only to provide a boost in the overall credit outlook.
Most of the risks or disadvantages are held by the cosigner. If you don’t pay the loan, they could become responsible for it. They could also suffer from a lower credit score if you’re late with car payments because it might get reported to their credit too.
As a borrower, you might experience a few disadvantages in using a cosigner. First, you have to get someone to agree to this, and you typically want it to be someone with good credit. Trusted family members are the most common cosigners, but that could mean that they might want to have a say in what type of vehicle you get.
And if something happens and you can’t pay the vehicle loan for any reason, you run a personal risk. You could damage your relationship with the cosigner if they do end up having to pay off the loan or face damage to their credit.
The decision is personal. Before you do anything, check your credit and understand where you are financially. That helps you know what your chances for getting approved for a loan are on your own and how much loan you might be able to afford.
Then, check out some potential auto loans and consider whether you should apply for them on your own. If you know your credit is too poor or you try to apply for a loan and don’t get favorable terms, talk to a potential cosigner. Be honest about your situation and have a plan to pay the loan on time each month so they feel more confident supporting you as you make this purchase.
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