Auto Loans: Pro and Cons of Using a Cosigner
If you have to find a cosigner in order for you car loan application to be approved, chances are your credit score does not place you in the category of prime borrowers. 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. Since loan agents determine the risk inherent in a possible borrower, if there is not sufficient information on their credit worthiness, a cosigner may be required.
Advantages of Using a Cosigner
Having a person cosign on your loan means they are putting their credit rating on the line in order for you to secure your loan. Thus, the biggest advantage of having a cosigner is to you, the borrower. If a lending agency refuses to accept your application because of spotty credit or no credit, you benefit from having a cosigner because it is their signature and willingness to back up the debt that enables you to receive the loan. You, as a potential borrower, may be entirely responsible with money, but if they have no credit rating, most lenders will refuse to give them a loan. A cosigner provides you in essence with the strength of their credit rating. What they are effectively agreeing to is taking on the loan payments should you default.
Disadvantages of Using a Cosigner
The primary disadvantage of using a cosigner is to the cosigner. They are taking on a risk that they—at least at first—are not responsible for. If the borrower should default on the loan or fall into delinquent status, it becomes the cosigner’s responsibility to pay the loan back. For this reason, cosigners are typically only family members such as parents or spouses. It is a tremendous chance they are taking by being willing to pay another’s debt which can prove disastrous. Of course, if the borrower is responsible, it should never come to that, but it is nonetheless a risk.
Another disadvantage is to the borrower, for it is the cosigner’s credit rating that is considered. If the cosigner’s credit is eligible for an interest rate, no matter how unfavorable, that is what the borrower will receive. Thus, the borrower is at the mercy of the cosigner’s credit score. That is the price one has to pay for using a cosigner on a loan, though. Otherwise, the borrower would never be approved. Any mark or blemish present on the cosigner’s credit score will affect the rate and terms received by the borrower.
Cosigning on a loan has pros and cons to both the borrower and the cosigner. If the borrower defaults on the loan, it is disadvantageous to the cosigner because they become responsible for the repayment. However, without the cosigner the borrower might never have received the loan, a fact that is advantageous for that party. Lastly, the borrower is beholden to the cosigner’s credit rating because that is what will influence the approval of the loan. Before you take on a cosigner or agree to cosign on someone’s loan, consider the possible consequences of your choice.