How to choose the Right Cosigner for your Car Loan?
A cosigner is as an individual who:
- Signs the loan contract with the borrower;
- Is obligated to repay the loan if the borrower does not make payments;
- Has the joint liability for making regular payments; and
- Has no right to the vehicle.
How is a Cosigner different from a Co-Applicant?
A co-applicant (co-borrower) assumes the same responsibility as a cosigner but he/she enjoys the benefit of ownership. A co-applicant has right to the car.
Who needs a Cosigner?
Car buyers who do not have a strong credit application require a cosigner because he/she ensures the lender of regular payments and reduces the lender’s risk. So, a cosigner is often considered a boon by following people because he/she helps them in securing quick finance:
- Young car buyers with no credit history
- People with terrible credit score
- People with low income
- Car buyers with short employment history
- Car buyers with repossession or bankruptcy in the past
Is a cosigner needed for a “joint car loan”?
A car loan is considered a “joint car loan” if the following applicants are involved:
- A primary borrower
- A co-applicant or a co-borrower
If both the applicants have credit issues or any other financial problem, lenders make cosigning compulsory.
Who is eligible to become a co-signer?
Usually, parents co-sign car loans for their children. It is for this reason many people believe that the only criterion for becoming a cosigner is to be the relative of the borrower. But, it is a myth. Following are the criteria for becoming a cosigner:
- Preparedness to Co-Sign
Many people will be ready to inform the lenders about their willingness to become your cosigner. But, just an informal promise or a verbal agreement is not enough to become a cosigner. So, ensure that your cosigner is prepared to sign the loan contract and is willing to assume the responsibility of your car loan.
- Good Credit Score
A cosigner is required to have a good credit score. He/she must pay bills on time and have an experience of obtaining a variety of debts such as mortgage loans, credit card debts, personal loans, etc.
Usually, lenders require a cosigner to have a credit history of at least five years. So, make sure that you check the prospective cosigner’s credit history before talking to the lender.
- Ability to Repay the Loan
Lenders don’t allow anyone to become a co-signer. A person can co-sign your loan contract if he/she can repay the loan. Your cosigner needs to submit the financial documents to the lenders so that they can check his/her financial situation:
- Bank statements
- Property details
- Ongoing loan information
- Pay-stubs
- IT returns (if the cosigner is self-employed)
- Employment and Residential Stability
If your cosigner switches jobs frequently, lenders will consider his/her employment status unstable and reject your loan application. It is because lenders want a cosigner to have a stable employment.
Also, lenders require a cosigner to have a stable residence history. It is ideal if your prospective cosigner is residing at the same address for at least two years.
So, these are the criteria for becoming a cosigner. If your lender has asked to bring a cosigner, don’t forget to use them. It will help you in choosing the right cosigner for your car loan.