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If someone you know—like a close friend or a relative—wants to apply for a car loan but is worried about being rejected, they might seek help. Perhaps they have bad credit or a high debt-to-income (DTI) ratio. Either way, they might ask you to be a co-signer on their loan to help them qualify. Here’s what you should understand before agreeing to co-sign an auto loan. Compare Rates and Save on Your Auto LoanGet up to 4 loan offers in minutes at myAutoloan.com. Things to Consider Before Co-signing a Car LoanIf you’re going to become a co-signer, make sure you have a good credit score, strong history of making your payments on time and/or a low DTI ratio. This will make the lender less concerned about approving the loan and even help the borrower secure a lower interest rate. However, there are many other factors to consider when deciding whether it’s a good idea to co-sign a loan or not. Here’s what you should know: What Your Obligations AreBy becoming a co-signer, you’re agreeing to guarantee the other person’s debt. If the borrower doesn’t make payments on the car loan or defaults, you’ll be on the hook for repaying the loan. However, keep in mind that while you’re signing on to be responsible for someone else’s car loan, you don’t get a title or ownership of the car in any way. You Could Become Responsible for Repaying the LoanAs a co-signer, you’re fully responsible for paying back the loan to the lender, not merely vouching for the primary borrower. You’re responsible for making the monthly payments if they stop paying. So be certain that you have the ability to make those monthly payments now and in the future. If the primary borrower defaults on the auto loan, the lender could then sue both of you to claim the outstanding loan balance, depending on the law in your state, which could hurt your finances. Co-signing Will Impact Your CreditBefore agreeing to co-sign, consider how it will impact your ability to access credit. Once you co-sign a car loan it will be listed on your credit report as part of the total amount of debt you have. This will increase your DTI which could impact your ability to get a credit card, mortgage or other loan. Any missed payments on the car loan that you co-sign can also make it difficult to get another loan in the future as on-time payment history is a major factor of your credit profile. How to Co-sign a Car LoanCo-signing a loan means both you and the main borrower are responsible for the debt, so you will both have to fill out a loan application. Just like with any car loan application, the lender will require proof of your employment history—both current and previous employers—as well as proof of your income. So, be ready to provide recent pay stubs as well as documentation regarding any other assets and income sources. If you’re self-employed, you’ll need to bring two or three years of tax returns. The lender will also pull your credit report to evaluate your creditworthiness. Be mindful that your credit score will take a temporary hit when they do this. So make sure you aren’t planning on applying for another loan not too long after. How to Remove Yourself From a Co-signed Car LoanIf you decide to co-sign a car loan, you or the other borrower may decide down the line to no longer be jointly responsible for repayment. Once you have secured the other party’s agreement to get your name off the loan, there are a few ways to achieve co-signer release:
If You Decide to Co-sign a Loan—Protect YourselfThe Federal Trade Commission (FTC) has recommendations regarding what steps you can take to protect your financial well-being if you decide to co-sign a loan:
Can you get approved with bad credit with a cosigner?A co-signer may increase your chance of approval, give you access to better loan terms and — over time — help you improve your credit score as you pay back your auto loan. Improve your chance of approval. A co-signer adds to your application if you don't have an extensive credit history or have a poor credit score.
What credit score do I need if I have a cosigner?If you're planning to ask a friend or family member to co-sign on your loan or credit card application, they must have a good credit score with a positive credit history. Lenders and card issuers typically require your co-signer to have a credit score of 700 or above.
Can you get denied even with a cosigner?A cosigner isn't a cure-all for every situation. They can “lend” you their good credit score to help you meet auto loan requirements, but if your credit reports have serious negative marks or you fall short in other areas, you could still be denied a car loan with a cosigner.
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