What is a Cosigner?
A cosigner is someone who agrees to be responsible for repaying a loan or debt if the primary borrower fails to do so. The cosigner will be required to sign the official loan contract as well as the primary borrower, making them equally obligated to repay the debt.
This means that if the primary borrower defaults on the loan and starts missing payments, the legal obligation falls on the cosigner to do so.
Most often, cosigners are family members or close friends of the borrower. The cosigner may also be a business associate or someone with a good credit history who is willing to help the borrower get approved for a loan.
Typically with a cosigner, the secondary party is only involved for the purpose of getting the primary borrower approved. This is unlike a co-borrower situation, where both parties often intend to use the item that is being financed.
Whether you’re in the role of the cosigner or the primary borrower, when it comes to car loans it is crucial to think about your options and have very honest conversations with the people involved. This will ensure everyone is on the same page with each person’s expectations and obligations pertaining to the car loan.
When Do You Need a Cosigner?
For some car buyers, a cosigner is not required. If the lender is not requiring a cosigner, there is really no benefit to having one officially on your car loan.
Lenders will determine if a cosigner is required based on a risk assessment consisting of a potential car buyer’s employment and income history, credit score, and other financial aspects.
There are a few different situations where you might need a cosigner for a car loan.
One of the most common factors that result in a cosigner requirement is damaged or limited credit history. This is because lenders see those with bad credit as higher risk buyers, who may be more likely to default on the loan. A cosigner gives the lender someone else to hold responsible for repaying the loan, which makes them more likely to approve it.
If you’re not sure whether you need a cosigner, it’s always best to check with the lender before applying for a car loan. They’ll be able to let you know if a cosigner is required and, if so, who would be eligible to act as one.
How Does Cosigning Impact Credit for the Borrower and Cosigner?
The cosigner’s name will appear on the borrower’s credit report along with the their name. This can impact the cosigner’s credit score. Initially, it’s likely that their credit score will drop slightly, just due to the hard credit inquiry of the car loan.
However, over time as payments are made, the impact to both the cosigner and primary borrower’s credit can be either positive or negative.
If the borrower makes timely payments, it can help improve the cosigner’s credit score. But, payments start to become late or missed and the loan is delinquent, it can damage the cosigner’s credit score as well as their own.
The cosigner may be released from the loan agreement under certain circumstances, such as if the primary borrower decides to refinance the auto loan after improving their credit score or paying off a certain amount of the debt.
The lender may also agree to release a cosigner if the borrower finds another cosigner to replace them. Ultimately, it is up to the lender whether or not to release a cosigner from their obligations under a loan agreement.
How Does Cosigning on an Auto Loan Work?
Most of the cosigner process is paperwork at the dealership during the car buying process. The person identified as the cosigner will have to be reviewed by the lender as well to ensure they are qualified in addition to being willing to cosign on the loan.
They will have to go through a credit application just as the primary borrower will and sign many similar agreements. They will also have to provide documentation for proof of income, residency, and other verification.
Once signed, the cosigner becomes equally responsible for the loan, which means that if the primary borrower misses a payment, the cosigner becomes responsible for making the payments. If neither party completes the payments and default on the loan, both the primary borrower and the cosigner’s credit scores will take a hit.
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