Should You Get a Cosigner on a Car Loan?

What Is a Cosigner?

A cosigner is someone who applies for a loan with you and shares responsibility for repaying the loan. Although a cosigner does not co-own the vehicle, they are listed on the loan agreement and must make the loan payments if you can't. The lender considers both your and the cosigner's credit histories and finances when reviewing your loan application. A cosigner's good credit history helps reduce financial risk to the lender, which may help you qualify for a loan you might not otherwise get.

Each auto lender has its own credit requirements, but typically a cosigner needs a credit score of 670 or more. Lenders also calculate the cosigner's debt-to-income ratio (DTI), which measures how much of their income goes to pay debt. Since your cosigner may need to take over monthly loan payments, their DTI will need to be within the lender's limits.

When Do You Need a Cosigner for a Car Loan?

You might need a cosigner for an auto loan if:

• You have little or no credit history. If you've never had a credit account or are new to credit, credit scoring models may not have enough information to generate a credit score for you. A cosigner can help you get a loan despite a thin credit file.
• Your DTI is too high. A high debt balance relative to your income could make it hard to pay your car loan. Typically, a DTI of 36% or lower will help you qualify for favorable terms on an auto loan. If your DTI is over 50%, however, lenders may deny your application or charge high interest rates. Find your DTI by adding up your monthly debt obligations, such as mortgage, minimum required credit card payments and student loan payments and dividing the total by your gross monthly income.
• You don't have good credit. Higher credit scores may help you qualify for better loan terms and larger amounts. According to the FICO Loan Savings Calculator, the average annual percentage rate (APR) for a 60-month, $30,000 auto loan in November 2023 was 7.7% for borrowers with FICO^® Scores^☉ between 720 and 850. Borrowers with FICO^® Scores of 500 to 589 pay an average of 17.65%.

Pros and Cons of Buying a Car With a Cosigner

Evaluate these pros and cons when considering a cosigner for an auto loan.

Pros of Using a Cosigner

• It can help you get approved. A cosigner can ease a lender's concerns that you're a high-risk borrower by ensuring the loan will be repaid even if you default.
• It could qualify you for a better interest rate. A cosigner's good credit score could offset your poor score, helping you get a more affordable auto loan with a lower interest rate.
• It can help you build credit. The auto loan will appear on your credit report and your cosigner's credit report. If you make loan payments on time, the loan will help to build credit history and increase credit scores for both borrowers.
• It could help you afford a better car. As of October 2023, the average new car cost $47,936 and the average used car cost $26,533, according to Kelley Blue Book data. Without a cosigner, you may have to settle for an older used car. A cosigner could help you get the financing you need to purchase a reliable new car.

Cons of Using a Cosigner

• You could end up with a loan you can't afford. A cosigner can help you qualify for a bigger loan than you could get on your own. But if high monthly payments put a squeeze on your budget, you may wind up struggling to save for future goals—or even to pay your monthly bills.
• Your credit (as well as your cosigner's) could suffer. Missed car payments will negatively impact your credit and your cosigner's. Your credit scores will take an even bigger hit if the car is repossessed. Even if you make payments on time, the loan's presence on the cosigner's credit report increases their DTI, which may make it harder for them to borrow money in the future.
• It could cause personal conflicts. If you can't make your loan payments, your cosigner will have to pay, which could hurt your relationship with them.

How to Get a Car Loan With a Cosigner

To get a car loan with a cosigner, follow these steps:

1. Find a lender that allows cosigners. Some lenders don't allow cosigners. Contact banks, credit unions, auto dealerships and auto lenders to see if they are open to cosigners and get a head start on searching for a loan.
2. Choose a potential cosigner. A family member or close friend with a relatively high credit score, steady income and minimal debt is an ideal person to ask.
3. Talk to your cosigner. Your cosigner may be more open to helping you out if you show you've put serious thought into your auto purchase. Discuss the vehicles you're considering, their estimated price and how much you've saved for a down payment. Be ready to share details about your finances and plan how to deal with potential problems. For example, if you lose your job, do you have enough savings to keep making your loan payments, or will the cosigner need to take over immediately?
4. Check your credit reports and credit scores. Before applying for an auto loan, both you and your cosigner should check your credit scores and get copies of your credit report from Experian or AnnualCreditReport.com. Review your credit reports for negative entries that may be affecting your scores, including late payments and recent hard inquiries.
5. Shop around for a loan. Compare loans from lenders you've identified. You can fill out a preliminary loan application online to get preapproved. While this isn't the same as approval, it will give you an estimate of the loan size and APR each lender will offer. Minimize any negative impact multiple loan applications may have on your credit score by limiting your loan applications to a 14-day period.
6. Apply for the loan. After choosing the best loan offer, submit a loan application. Both you and your cosigner will need to provide financial information to the lender and authorize a credit check. If you're applying for a loan in person, your cosigner may need to be present.

How to Improve Your Credit Score

Getting a cosigner isn't the only way to get an auto loan. Increasing your credit score could enable you to buy a car without a cosigner. If you can't find a cosigner or just don't want to go that route, take these steps to build your credit:

• Pay down debt. Reducing credit card debt can help increase your credit score by lowering your credit utilization ratio. This ratio measures how much of your available revolving credit you're currently using. Keeping credit utilization low can help improve your credit score; utilization of 30% or more can have a greater negative effect.
• Catch up on late payments. Bring any past-due accounts and charge-offs current. Newer credit scoring models ignore paid-off collection accounts.
• Pay your bills on time. Payment history is the single most important factor in your credit scores. Set up calendar reminders or schedule auto-payments to ensure you never miss a payment.
• Avoid applying for new credit. Whenever you apply for a new loan or credit card, it results in a hard inquiry, which can temporarily lower your credit score. Several hard inquiries in a short span can have a compounding negative effect on your credit scores.

The Bottom Line

If your credit score is less than stellar, applying for a car loan with a cosigner can help you land a better loan than you might get on your own. Once you receive the loan, commit to making your payments on time so your cosigner doesn't have to step in. To see how on-time loan payments affect your credit, sign up for free credit monitoring from Experian to track your FICO^® Score and get important alerts to changes in your credit report.