The requirements for cosigner approval vary depending on the institution. In most cases, the cosigner is being added to the loan in order to strengthen your application and increase your chances of getting approved for your ideal vehicle.
Cosigners are required for borrowers who either have no credit history or whose credit has taken a hit from past financial transgressions. The presence of a cosigner on a loan application mitigates the risk that a potential borrower poses. Below are the most important requirements for cosigner approval.
Credit bureaus begin recording a person’s credit history when the subject is 18 years old. In order to serve as a good cosigner, a credit history of at least five years (perhaps longer) is required. The cosigner must also pay his or her bills on time and have good experience with a variety debt types, both revolving and installment.
Many automotive lenders consider past auto credit to be one of the most important requirements when applying for a loan as a cosigner. If a potential cosigner is guaranteeing a type of loan with which they have no personal experience, the lender will have no reliable basis on which to base their approval.
While some lenders allow unrelated cosigners or distant family members, others require that a cosigner is closely related to you. Others may even require that the cosigner live at the same address, requiring proof of utility bills addressed to the cosigner.
Remember that a cosigner will be equally responsible for the timely payment of the loan, so make sure that your possible candidate knows of their obligation should you fail to pay the monthly payment on time. The cosigner’s credit history and credit score is impacted negatively if payments are missed and vice versa if payments are made consistently until the loan is ultimately paid off.
Most lenders will require proof of income, which may require three months’ worth of pay stubs or a letter from the cosigner’s employer.
Even cosigners with excellent credit can have difficulty strengthening another’s application if their annual income is not deemed high enough to support the monthly payment of the loan. Also, potential cosigners with one or two open auto loans may find getting an approval difficult even if their income is large enough.
The auto loan cosigner is responsible for the vehicle, so the cosigner actually has full rights and responsibility. This may sound a bit odd but it is necessary so that the financial institution can protect its investment. When you involve a strong cosigner in the mix of a new or used car purchase, you are telling the dealership that this is the person who is actually responsible for the vehicle.