Get a Cosigner for a Bad Credit Car Loan

Do you need a car? Do you have bad credit? Do you have no credit? If so, you may want to consider finding a co-signer for your loan. Many lending companies are willing to grant a car loan to an individual with bad/no credit provided that a cosigner is willing to guarantee the repayment. Your cosigner will sign a “surety contract,” which is a legally binding agreement in which the signer (the cosigner) agrees to accept another person's legal obligations should that person fail to meet them.[1] There are many risks you ought to consider before deciding to go down this route and involve another person in your financial concerns, but in many cases finding a cosigner is really in your best interest. Read on to learn how to proceed responsibly.

Steps

Deciding if You Ought to Find a Cosigner

  1. Consider finding a cosigner if you have no credit. For example, you might need a car loan so that you can purchase a car to remain steadily employed so that you can earn enough to apply for credit, but you need credit to be able to get the car, to get the job....! If you find yourself in this frustrating circle, you may be able to get out of it by finding a cosigner.
    • If you are young or have just started your work history and have never applied for a credit card or loan before, you are unlikely to be able to secure a car loan by yourself. Applying with a cosigner will make you less of a risk in your potential lender's eyes.
  2. Consider finding a cosigner if you have bad credit. Even if you have managed to establish a credit history, your score may not be strong enough for you to qualify for a loan with favorable terms. You may be denied a loan or will only be given one with a prohibitively high interest rate.
    • Credit scores (often referred to as FICO scores) range from 350 (which indicates that you are high risk and likely to default) to 850 (which indicates that you are a very low risk borrower).[2]
    • Ideally, your credit score should be above 700. The further below that your score falls, the higher your interest rate will be, assuming you will even be granted a loan.
  3. Consider finding a cosigner if you've been denied a loan. Even if you have a credit history and a good credit score, you may be denied a car loan. There are many possible reasons for this, just a few of which are as follows:
    • You may not have a long enough credit history, you may have recently been late on a payment (which won't lower your credit score much, but which could make the current lender see you as a risk), or you could have recently applied for too many other lines of credit.[3]
    • If this is the case then getting a cosigner may be your only recourse if you really need this loan.
  4. Consider finding a cosigner if you've been offered a loan with bad terms. Again, there are various reasons why you may be offered a loan with unfavorable terms, such as a high interest rate. Your credit history may not be long enough, your score could be lower than you think it is, your income could not be high enough, etc.
    • Your credit risk will be lowered if you have a cosigner—the lender can be more assured that they will be paid because your cosigner is guaranteeing eventual repayment. Thus, you should be charged a lower interest rate than if you had secured the loan by yourself. [4]
  5. Get a free credit report before applying. Your decision about whether to ask someone to cosign for you will be aided by knowing what your current credit score is. You should also know this before you apply and begin to negotiate the terms of your loan.
    • You are entitled to a free credit report once every twelve months.[5] See our related wikiHow to learn how to get your credit report for free.
    • Keep in mind that credit reports summarizes your credit history: what credit cars and loans you have/have had in your name, how much money you owe, and your payment history (whether you pay your bills on time or late).[6]
    • They do not contain your FICO score, which is based on your credit history. The only way to know your score is to pay for it (various companies provide this information for a fee), but so long as you know your history, you can have a good idea of whether or not your score is strong or weak.[6]
  6. Buy yourself time to build (or rebuild) your credit with a cosigner. One of the advantages to having a cosigner is that you can give yourself a bit of breathing room to improve your credit score.[4]
    • Assuming you will make timely payments, you will be in a better position down the road to be able to get loans on your own at good interest rates and with favorable repayment plans.
    • The cost of securing loans with a bad credit score is high: on a $20,000 loan, people with low credit scores pay an average of $5000 more than those with strong credit scores.[7]
  7. Understand that relationships may be jeopardized. Nearly three out of four cosigners end up being responsible for the principal borrower's loan.[1]
    • Another way of understanding this: almost 75% of people who secure cosigners default on their loans and place the burden of repayment upon their cosigners. As you might imagine, this can lead to strained relationships.
  8. Understand the full extent to which your cosigner will be on the hook. Should you default, late fees and collection costs may be passed on to the cosigner, which increases the cost of what they are now responsible for paying, often beyond the amount of the original loan (remember that interests rates also apply).[1]
    • In some states, lenders are allowed to seek repayment from cosigners without first making efforts to contact you (the principal borrower).[8] Your cosigner could be sued, and/or their wages could be garnished if you fail to make repayments, even if you haven't yet received notices from your lending company or a collection agency.

Finding a Cosigner

  1. Consider asking a parent or close relative to cosign. Once you decide that you need (or will benefit) from having a cosigner, you'll need to identify an excellent candidate. Deciding to ask a parent or family member with whom you are on good terms could be a smart move.
    • If you live with your cosigner, this can also help simplify the process, as the correspondence relating to your loan will be sent to the same address.
  2. Consider asking your spouse to cosign. If you are married or in a domestic partnership, a natural candidate for a cosigner would be your partner. You may think that you should (or have to) apply jointly for credit if you are married, but this is not the case.[9]
    • Indeed, it's important that you retain your own credit history throughout the course of your relationship. If everything is always in your spouse's name, you will be left with no credit should the relationship end.
    • Thus, you can apply for a loan as the principal borrower, but have your spouse or partner be a cosigner. It's not necessary, though, that you have your spouse cosign.You may choose anyone you want.[5]
  3. Consider asking someone else close to you. You needn't feel as though you must ask a relative to cosign. Indeed, you may prefer to keep your financial and family matters separate.
    • You want to select someone who knows you well, who trusts you, and who you will be able to contact easily and communicate with clearly.
    • Additionally, your potential candidate must actually qualify to be a cosigner. We'll explain how you can assess this in a later step.

Convincing Your Choice to be a Cosigner

  1. Make an appointment. Asking someone to be a cosigner is a big favor, and should they agree, they are taking a substantial risk for you. You want to convince them that you are fully serious and responsible, and so you ought to treat this as a serious business matter. One way to do that is to request an appointment with them.
    • For example, rather than putting your mom on the spot at the dinner table, try the following: “Mom, as you know I've been researching cars and loan options. It looks like I'll be able to qualify for a much better loan with a cosigner. Could we talk sometime in the next day or two about you cosigning for me? I can show you all of the relevant paperwork then and address any of your concerns.”
  2. Clearly explain why you need a cosigner. You will have better luck convincing them to cosign if you can show them evidence of why you need or would greatly benefit from having a cosigner. Be prepared to show them paperwork which explains either why you can't get credit or would get much better credit with a cosigner.
  3. Do your homework about the loan. You should also be able to show your potential cosigner any information about the details of the loan you are hoping to get: what will the balance be? What will the interest rate be? What will your monthly payments be, and for how many months/years will you be making payments?
  4. Share your repayment plan with your potential cosigner. Since how you handle your repayment can affect your cosigner’s credit history, you must do your best to submit your loan payments without delays. Your potential cosigner may be worried about your ability to do this, so you should be willing to present them with a detailed plan or schedule of how you plan to make your payments.
    • This means that you are going to have to be willing to share personal details about your monthly income and expenses.
  5. Explain how they will be affected should they cosign. If the person you are approaching doesn't understand the role of a cosigner, be sure to clearly explain that to them. You should also be sure that they understand how their credit may be affected.
    • Even if your cosigner is never asked to take over payments, the fact that they have signed on as a guarantor for your loan will be included in their credit report. This could bring their score down.[1]
    • Because your cosigner is now responsible for your loan, they may not be eligible to receive other loans for themselves.[8]
  6. Remember to express your gratitude. It's important that you express to your potential cosigner both your understanding of the magnitude of this favor and your appreciation, should they agree to help.
    • The other person may feel taken for granted if you approach them with the attitude that they have to help you because they are your relative or friend. This may make them question your commitment to repaying the loan and protecting them.
    • Be sure to conclude your presentation and request with something like the following: “Mom, I know I'm asking you to take on a significant risk, and so I want you to know just how serious I am about handling this loan responsibly. I would be so grateful if you would be willing to help.”
  7. Shrug it off if you are denied. It may be hard not to take it personally if the first person you approach is not willing to cosign for you. By all means, you may politely ask them if they are willing to share their reasons with you. It's possible that you can then address their concerns and turn things around.
    • If they remain firm in their denial, though, you will have to accept that. A person's reasons for not taking on a financial risk can be varied, and they may not want to share them with you.
    • It's not worth destroying what was an otherwise good or important relationship over money matters.

Handling Your Loan Responsibly

  1. Be certain that this person qualifies to be a cosigner. Your cosigner will need to have a good or excellent credit history to balance out your own bad credit. Similarly, they must be capable of shouldering the repayment obligation in case you fail to keep up with the repayment. If you default on your payments, the cosigner will be required to make the repayments, or your lending company can take legal action against both of you.
    • Typically, cosigners are required to have credit scores of 700 or above.[4]
  2. Have your cosigner gather documentation. Because your cosigner will be asked to provide evidence of sufficient income and/or assets to be able to guarantee your loan should you default, they may have to be prepared to show pay stubs, wage vouchers, or income tax returns.[4]
    • They may also be required to provide evidence of stable employment and residency.[4]
  3. Read the contract carefully. Once your cosigner has agreed to help you out, you both should be fully aware of the details of the repayment agreement.
    • Make sure that it's clear when and how late penalties will be assessed, how many payments can be missed before the cosigner becomes responsible, and how your cosigner will be contacted.[4]
  4. Negotiate for the best possible terms for both of you. It may be possible to obtain a contract in which your cosigner will only be responsible for repaying the principal balance of the loan, should you default.[1]
    • Don't assume that this will be the default arrangement; you'll most likely have to negotiate for such a clause.
  5. Provide your lender with complete contact information. It's very important that neither you nor your cosigner miss any notifications from your lender; unfortunately, it can happen that mail can be lost or sent to the wrong address, particularly if you and your cosigner don't share the same address.[4]
    • In the meantime, late fees and penalties could accrue, and both of you could be on the hook.
  6. Keep your cosigner in the loop. Keep copies of all of your loan documents, and also keep copies of your payment information. Avoid making late payments, and inform your cosigner if you do fall behind.
    • It's also a smart idea to make arrangements at the time of the original agreement to have your lender send written notifications to your cosigner when/if you fall behind payments.[1]

Tips

  • After a few months of consistent payment to your car loan, you should be able to see an improvement in your personal credit history. You may be able to renegotiate your loan to have your cosigner removed.
  • Make sure that you are aware of your payment schedules and always be prepared with your payments. Being consistent with your payments not only protects your cosigner’s credit, it also helps you to rebuild your bad credit.
  • If you think that you are unjustly being denied credit (or only being offered credit at a high interest rate), you should learn more about your credit rights by visiting the Federal Trade Commission's website or researching your state's laws.[5]
  • Check your state's law for additional information about cosigner's rights (the specific rights which apply both to principal borrowers and cosigners may vary from state to state).[8]

Warnings

  • Never add someone's name to your credit application as a cosigner without securing their permission first.

Related Articles

  • Get a Home and Property Disaster Loan
  • Get a Loan Without Private Mortgage Insurance (PMI)

Sources and Citations

  1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 http://consumer.findlaw.com/credit-banking-finance/what-are-surety-contracts.html
  2. ↑ http://www.forbes.com/sites/investopedia/2012/07/20/the-importance-of-your-credit-rating/
  3. ↑ http://www.moneyunder30.com/why-was-my-credit-card-application-denied
  4. ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 http://www.carsdirect.com/auto-loans/requirements-for-using-a-cosigner-for-a-car-loan
  5. ↑ 5.0 5.1 5.2 http://www.consumer.ftc.gov/articles/0347-your-equal-credit-opportunity-rights
  6. ↑ 6.0 6.1 http://www.consumer.gov/articles/1009-your-credit-history
  7. ↑ http://www.forbes.com/sites/ashleaebeling/2013/05/13/five-credit-score-misconceptions-that-can-cost-you/
  8. ↑ 8.0 8.1 8.2 http://www.consumer.ftc.gov/articles/0215-co-signing-loan
  9. ↑ http://www.nolo.com/legal-encyclopedia/protect-good-credit-after-marriage-29815.html
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