While getting a car loan is common practice, a bad credit score can complicate the process. If you don’t have time to build or improve your credit score before you buy a car — whether your new out-of-town job starts next week or you need room for a new car seat in a few short months — getting a cosigner can help you get approved for auto financing.
If you have a family member, spouse or close friend with good credit who is willing to help you get a car loan, there are a few things both parties should be aware of before signing the dotted line. In this post, we’ll explain how cosigning a car loan works.
What does a cosigner do for a loan?
For most lenders, creditworthiness is the main factor in determining whether or not you will be approved for a loan. If you have a poor credit score or no established credit history — as is often the case with young adults or new Canadians — a lender may think twice about your ability to pay back a loan. Teaming up with someone with good credit can make your application stronger.
What happens when you cosign a loan?
A cosigner is essentially lending you their good credit so you can secure financing and access lower interest rates. They are also taking on the responsibility of paying back the loan if you fail to do so. You and your cosigner are equally accountable for the money borrowed.
How can a cosigner be removed from a loan?
You can’t remove a cosigner from a loan. Once the paperwork is signed, your friend or family member is attached to the loan until it’s paid off. A loan agreement is a legally binding document and your cosigner is in it for the long haul.
Is there any way to get out of cosigning a loan?
Even if your credit situation changes or you have a falling out with your cosigner, you won’t be able to remove them from the contract since your loan approval was based on their financial backing. The only way to release them from the contract is to renegotiate your car loan or get a new loan altogether — something that can be difficult with bad credit.
It usually takes several years to pay off a car loan. With that in mind, make sure your cosigner is someone you have a longstanding and trustworthy relationship with.
How is a cosigner’s credit affected?
A cosigned loan will appear on both parties’ credit reports — which can be both a good and a bad thing. Good, because paying off the loan as agreed can help you improve your credit score. Bad, because both you and your cosigner’s credit rating will be negatively affected if you can’t keep up with payments.
Can cosigning improve your credit?
Your credit score describes your ability to take on and pay off debt. If you are a 19-year-old university student or a recent immigrant to Canada with no credit history, a cosigned car loan can be a great opportunity to establish yourself as a responsible borrower.
However, if you buy a car that is too expensive for your budget or sign on to a loan with a higher interest rate than you can handle, you risk defaulting on your loan. If that happens, your credit and your cosigner’s credit will take a hit, which can affect their ability to be approved for a loan in the future.
Your cosigner might not be notified if you miss a payment
Lenders aren’t obligated to tell your cosigner if you miss a payment because they aren’t the primary signatory on the loan agreement. This means their credit could be affected without their knowledge.
Your cosigner is equally responsible for making sure each loan payment is made on time and in full. Because of this, it’s important to let your cosigner know if you’re unable to make a payment so they can step in and help before the money is due. Better yet, giving your cosigner a monthly update will make sure everyone is on the same page.
You might feel embarrassed about having to miss a payment, but you’ll both be better off financially if you keep your cosigner in the loop.
How to get approved for a loan without a cosigner
Even if you have bad credit, it is possible to get a car loan without relying on a cosigner. Banks and credit unions have strict rules and regulations that can make it difficult for them to offer loans to customers with less than stellar credit. But, banks aren’t the only option.
Most car dealerships have in-house financing options that are more flexible than those offered by a financial institute. Open Road Outlet specializes in car loans for people with bad credit. We know that everyone’s financial and credit situation is different and we look beyond your credit score to try and find the best loan option for your budget.
Open Road Outlet is the only dealership in Manitoba that lends its own money. That means more approvals, better repayment terms and lower rates. Get in touch with one of our friendly advisors to learn more about our fast and easy application process.