Auto Loans

Is Getting a Cosigner for Your Auto Loan a Good or Bad Idea?

It can sometimes be tough to get an auto loan, especially if you don’t have good credit or a steady paycheck. You may be charged outrageous rates for an auto loan, and in some cases, you might even be denied outright.

Maybe you’ve heard about getting a cosigner for an auto loan, but can that actually help you? Here’s a look at what that means and the pros and cons, as well as some alternatives to getting a cosigner for your car loan.

What is a cosigner?

A cosigner is someone who signs his or her name on the dotted line for an auto loan along with you. It’s your responsibility to pay the loan back with on-time monthly payments. However, if you fail to pay the loan back, your cosigner is on the hook for the loan instead. That’s why your cosigner needs to be financially able to pay the loan back, in case you were to default on it.

What are the benefits of having a cosigner?

The only reason you’d want a cosigner for your auto loan is so you can make sure you get approved for the loan and are offered the best rates.

If you’re a young person, self-employed or have had problems managing your money in the past, it’s likely you have variable income and/or a poor credit score. If your credit score isn’t top-notch, you could end up spending thousands of dollars unnecessarily on an auto loan.

For example, let’s say you need to take out a $15,000 auto loan over the course of three years. If you applied by yourself and got a relatively high interest rate of 8%, your monthly payment would be $470. You’d also end up paying $1,922 in interest over the course of the loan.

Now let’s imagine that you applied with a cosigner and got an interest rate of 4% instead. With that rate, you’ll pay $443 per month, and over the course of the loan, you’ll pay $943 in interest — nearly $1,000 less.

Why wouldn’t you want a cosigner?

Asking someone to be a cosigner on your car loan requires a lot of trust. You’re getting all of the benefit from their good money management skills and they’re taking on all of the risk. The whole reason you’re charged a higher interest rate or even denied from getting an auto loan in the first place is that you’re statistically more likely to default on your loan.

If you do default on your loan or even make a single late payment, it can ruin a good relationship. Your lender probably won’t notify your cosigner that you’re past due on your payments until you’ve incurred several late fees, at which point they’ll come after them instead. By that point in time, you’ve also damaged your cosigner’s credit because they’ll report the delinquent account on both of your credit reports.

For this reason, it’s generally not wise for someone to cosign for your auto loan unless they have absolute faith in you.

What are some alternatives to getting a cosigner for an auto loan?

Luckily, you’re not out of options if you can’t find or don’t want to ask someone to be your cosigner.

If you don’t need a vehicle right away…

If you don’t need a car right away, you can save up for a bigger down payment. This will save you money in the long run, especially if you keep it in a high-interest savings account in which you can earn interest, rather than pay it out to someone else. You’ll also reduce your monthly payments with a larger down payment.

You can also take the time to build up your credit so you can get better rates when you do need a car. Paying down your debt (especially credit card debt) and developing systems to make sure your bills are all paid on-time can boost your credit very quickly.

If you do need some form of transportation right away, consider whether you can get by with public transportation for the time being. Check out if there are any bus, subway and rideshare programs available that’ll take you to and from your workplace and major shopping centers.

If you need a vehicle now…

If you just can’t get by without a vehicle, you can consider buying a cheaper car. No one needs to buy a $60,000 fancy-mobile to drive to work; for now, even an old beater will do as long as it’s mechanically sound.

Finally, you can consider extending the loan period for up to five years or more to lower your monthly payments. This is the least ideal situation, but sometimes you don’t have an option. If you pay all of your payments on time and adopt other good credit-building practices, you can even boost your credit score in a short amount of time and refinance later for better rates.

If we take our $15,000, 8% interest loan example from above, stretching out the payments over five years brings the monthly payments down from $470 to $304 — but you’ll pay a total of $3,249 in interest if you don’t refinance later.

You can check out what interest rates you might be able to get using SuperMoney’s guide to the best auto loan refinancing companies.