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Getting a Car Loan With a Co-Signer

Getting a Car Loan With a Co-Signer

Co-signing a car loan for someone can be risky, but also provides benefits in certain situations. On one hand, being a co-signer allows someone with little credit to qualify for an auto loan and potentially get better interest rates. However, the co-signer assumes equal legal responsibility for the debt and any missed payments can damage their credit score.


This guide will cover the pros and cons of co-signing an auto loan to help you decide if it’s the right choice. We’ll outline what responsibilities a co-signer takes on, requirements to become one, how to remove yourself as a co-signer, and alternatives if you can’t find someone to co-sign.



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What is a Co-Signer?

A co-signer is someone who agrees to be legally responsible for repaying an auto loan if the primary borrower defaults on payments or can no longer afford the loan. The co-signer’s credit score and history is used by the lender to determine if the borrower qualifies for the loan and what interest rate they will pay. By having a co-signer with good credit, it can help a borrower with little or poor credit get approved and receive better loan terms.

The co-signer’s name may or may not appear on the vehicle’s title, depending on the specific auto loan lender and their policies. Some lenders will list both names on the title, while others only require the primary borrower’s name. However, in all cases the co-signer is equally responsible for the debt and any missed payments can negatively impact their credit score.

 

Pros of a Co-Signer

There are several potential benefits to having a co-signer on your auto loan. A co-signer can be very helpful if you have little or no credit history. Most lenders want to see that you have established credit in order to approve you for a loan. Without much credit history in your own name, you may get rejected or only qualify for a loan with a very high interest rate. Adding a co-signer with excellent credit can help you overcome limited credit history.

Since your co-signer’s strong credit record will be taken into account, you may qualify for an interest rate much lower than what you could get on your own. This can save you thousands of dollars in interest charges over the life of the loan. Your co-signer’s good credit essentially gives the lender more confidence that the loan will be repaid responsibly.

Having a co-signer can also allow you to qualify for a larger loan amount that you may need to purchase the vehicle you want. Even if you have some credit history, it may not be enough to get approved for the car loan amount you desire. A co-signer provides the lender with extra security, increasing the chances you can borrow more money at a reasonable rate.

 

Cons of a Co-Signer

While having a co-signer can help you get approved for a car loan and potentially lower your interest rate, there are some downsides to consider:

 

Equally Responsible for Payments

When someone co-signs your auto loan, they take on equal responsibility for the debt. This means if you miss or default on payments, the lender can pursue the co-signer for the missed/outstanding payments. The co-signer is obligated to pay the loan as agreed, even if they aren’t the primary user of the vehicle.

 

Late Payments Hurt Co-Signer’s Credit

Any late or missed payments you make on the auto loan will likely show up on your co-signer’s credit report, damaging their credit score. Even one 30-day late payment can lower a credit score by over 100 points. This can negatively impact their ability to get other loans or credit down the road.

 

Hard to Remove Co-Signer Later

It can be very difficult to remove a co-signer from the auto loan later on. Most lenders require you to refinance the loan in your name only to release the co-signer. This usually requires establishing a strong credit history and income on your own. Some lenders may not allow co-signer release at all.

 

Requirements to Be a Co-Signer

If you are considering becoming a co-signer on someone’s auto loan, there are a few key requirements lenders will look for:

 

Good Credit Score

Lenders typically require co-signers to have a minimum credit score of 700 or higher. The higher your score, the better chances the primary borrower has of being approved and securing a low interest rate. With a score of 700+, you demonstrate responsible credit management.

 

Steady Income

Along with good credit, lenders want to see that you have a stable income that can support taking on the legal obligation of the auto loan. Provide recent pay stubs or tax returns to verify your income level and employment history.

 

Willingness to Accept Responsibility

Most importantly, you must fully understand and be willing to accept legal responsibility for repaying the auto loan if the primary borrower fails to make payments. Review the loan terms carefully before co-signing. Know that as a co-signer, the lender can pursue you for the debt if it goes into default.

 

Removing a Co-Signer

If you initially required a co-signer to qualify for your auto loan, you may eventually want to release them from the obligation. Here are some key steps to remove a co-signer from your car loan:

 

Make 12+ Consecutive On-Time Payments

Most lenders require you to demonstrate a solid payment history before they will consider releasing a co-signer. Typically, you’ll need to make at least 12 on-time monthly payments in a row. This shows the lender you are reliable and committed to repaying the loan as agreed.

 

Show Improved Credit or Income

In addition to consistent payments, you’ll need to provide proof that your financial situation has improved since originally taking out the loan. This could include boosting your credit score by 100 points or more, taking on a higher paying job, or having other positive changes to your income or assets.

 

Refinance the Loan Under Your Name Only

Once you’ve met the lender’s requirements, the next step is to formally remove the co-signer by refinancing the auto loan under your name only. This involves applying for a new loan to pay off the existing one. If approved, the co-signer will be released from the old loan when you close on the new refinanced one.

By demonstrating you can manage the payments solo and have improved finances, a lender may agree to release your co-signer and put the loan fully in your name through refinancing.

 

Alternatives if You Can’t Get a Co-Signer

If you don’t have someone who can co-sign for you, or you want to avoid putting a friend or family member at risk, there are a few other options to improve your chances of getting approved:

 

Save Up for a Larger Down Payment

Putting more money down upfront shows lenders you’re financially committed. Come up with a savings plan and deposit a portion of each paycheck until you have enough for a 20% or higher down payment. This lowers the amount you need to finance.

 

Apply for a Secured Loan Using Collateral

Some lenders offer secured auto loans which require an asset like cash or investments for collateral. This guarantees the lender will get repaid if you default. Shop around to find the best secured loan rates and terms.

 

Build Your Credit Before Applying

Establish a good credit history before applying for an auto loan. Get a secured credit card and use it responsibly, paying the balance off each month. Limit new credit applications. Review your credit reports and dispute any errors. With time, you can raise your scores.

 

Co-Signer Credit Implications

Co-signing a car loan can have a significant impact on your credit as a co-signer. When you co-sign, you are agreeing to be equally responsible for the debt, so the auto loan will show up on your credit report just like any other loan.

The loan payments (or any missed payments) by the primary borrower will affect your credit score and debt-to-income ratio. Since lenders look at your credit score and DTI when evaluating your creditworthiness, co-signing can influence your ability to get approved for loans in the future.

For example, if the primary borrower misses payments, it could cause your credit score to drop, potentially by over 100 points. This can make it harder for you to qualify for credit cards, mortgages, or other financing.

Additionally, the new debt obligation will negatively impact your debt-to-income ratio. Most lenders like to see your DTI below 36%, so taking on someone else’s car loan payments could push your ratio too high and jeopardize your chances of getting approved for new credit.

Before co-signing, be sure you can afford the monthly payments in case the primary borrower fails to pay. Understand the risks involved and have a plan in place in case you need to take over payments to protect your credit.

 

Co-Signer Rights

When you co-sign a car loan, you typically do not gain any ownership rights over the vehicle. Your name may or may not be added to the car title, depending on the lender. But in most cases, co-signing does not give you any claim to ownership of the car.

The main right you gain as a co-signer is the right to make payments on the loan and bring it current if the primary borrower misses payments. You have the right to keep the loan from going into default if the original borrower fails to pay. However, you do not have the right to take possession of the vehicle or sell it unless you become the sole owner.

Beyond the ability to make payments, co-signers have very limited rights. You have no control over how the primary borrower uses the vehicle. And if they damage the car, stop making payments, or default entirely, you have little recourse other than paying off the loan yourself or repossessing the vehicle to recover losses.

The core responsibility as a co-signer is being liable for the debt. If the primary borrower stops paying, the lender can pursue legal action against you for the missed payments and remaining balance. Before co-signing, make sure you can afford the monthly payments in case the primary borrower cannot.

 

Removing Co-Signer Risks

While removing a co-signer may seem like a good idea once you’ve built up your credit, there are some risks to consider:

Requires Refinancing – The most common way to remove a co-signer is to refinance the auto loan under your name only. However, refinancing comes with costs like application fees, closing costs, and potentially a higher interest rate. Refinancing also starts the loan term over, meaning you will be making payments for a longer period of time.

May Not Qualify Yet – Just because you’ve made 12 on-time payments doesn’t necessarily mean you’ll qualify for the loan on your own. Most lenders look for more payment history, like 24-36 consecutive on-time payments. They also want to see significant improvement in your income and credit score before approving you solo.

If you refinance too early, you run the risk of not qualifying on your own and being stuck with the co-signer. It’s generally better to wait until you are very confident you’ll be approved for the refinanced loan without needing a co-signer.

 

Co-Signer Alternatives

If you’re having trouble qualifying for an auto loan on your own, there are some alternatives to getting a co-signer that may help improve your chances:

 

Joint Loan Application

Applying for the auto loan jointly with another borrower who has better credit can help you qualify and get better terms, without making them 100% liable as a co-signer. With a joint loan application, both borrowers’ incomes and credits are factored in by the lender. This option gives you a chance to build your own credit history while benefiting from the other applicant’s credentials.

 

Gift Down Payment

Making a larger down payment could allow you to qualify for the loan yourself. If friends or family are willing to gift you money for a down payment rather than co-sign the loan, this provides you with less risk than having a co-signer. Just be sure the funds are properly documented as a gift to satisfy lenders.

 

Pay Off Loan Early

Making extra payments to pay off your auto loan early is another alternative to a co-signer. The faster you pay down the principal, the less overall interest you pay. Paying off the loan early also builds positive credit history.

 

When a Co-Signer Makes Sense

There are certain situations where having a co-signer on a car loan can be very beneficial for the primary borrower. Here are some examples of when getting a co-signer may make the most sense:

 

Young Buyer with Little Credit History

One of the most common reasons to use a co-signer is if you are a young buyer with very little or no credit history. When you first start out, you may not have had time to build up your credit score. Most lenders like to see at least 12-24 months of credit activity before approving an auto loan. Having an established co-signer with good credit can help you overcome the credit history hurdle.

 

Lower Interest Rate

Even if you have fair credit, adding a co-signer with excellent credit can help you qualify for a much lower interest rate on your car loan. The better credit score you can present to the lender, the lower your interest rate is likely to be. This translates into significant interest savings over the life of the loan.

 

Larger Loan Amount

Some lenders may approve you for a higher loan amount if you have a co-signer versus applying alone. This gives you the ability to purchase a more expensive vehicle than you may qualify for on your own. If your budget allows for a pricier car, a co-signer provides the opportunity to get approved for the loan amount you need.

 

When to Avoid a Co-Signer

While having a co-signer can help you get approved for a car loan, there are some situations where getting a co-signer may not be the best option:

 

Strained Relationships

Adding the legal and financial obligations of a co-signed loan can put extra strain on relationships between family members or friends. If your relationship is already rocky, co-signing a loan together may exacerbate existing tensions. Defaulting on the loan could permanently damage the relationship.

 

Co-Signer has Poor Credit

The whole point of having a co-signer is to use their good credit profile to qualify for a loan. If your potential co-signer actually has poor credit or a low credit score themselves, they likely won’t help improve your chances of getting approved. Look for someone else with a proven credit history.

 

High Risk of Default

Be realistic about your current financial situation. If you already have a lot of existing debt or doubt about being able to afford the monthly car payments, getting a co-signer may simply be delaying an inevitable default. Defaulting with a co-signer risks damaging their credit as well.

 

Conclusion

In summary, co-signing on a car loan can be beneficial if you have a trusted co-signer with good credit, but it also comes with risks. Having a co-signer may help you get approved for a loan or secure a lower interest rate. However, the co-signer takes on equal legal responsibility for the debt. If you miss payments or default, it can negatively impact their credit and finances too.

Before deciding to co-sign, the co-signer should carefully consider if they can afford the payments if needed. As the primary borrower, you should do everything possible to make the payments on time yourself. While co-signing can help in certain situations, it’s critical to weigh the pros and cons first and fully understand the legal implications for both parties.

Overall, co-signing a car loan is a major commitment with financial consequences. Proceed with caution, communicate clearly with the co-signer, and take steps to remove the co-signer as soon as possible if approved. With proper planning and care, co-signing can assist in getting an auto loan, but shouldn’t be taken lightly.

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Questions About Co-Signers & Car Loans

It’s a big responsibility to cosign for a car loan in Canada. As a cosigner, you become equally responsible for the debt if the primary borrower defaults. Before agreeing to cosign, consider if you can afford the payments if required and if it will impact your own ability to get credit. Review all loan terms carefully. However, cosigning may help someone if they have little or poor credit history to get a loan with better rates.

The main risks of cosigning a car loan in Canada are:

 

– You become legally responsible for the debt if the primary borrower defaults. The missed payments can negatively impact your credit score.

 

– Your own borrowing ability may be impacted as lenders will consider the cosigned loan part of your total debts. This could prevent you from getting approved for loans or credit cards.

 

– If the car is repossessed due to non-payment, you may still owe money on the loan balance after the car is sold at auction.

 

– Relationship problems if forced to constantly remind or chase the primary borrower to make their payments on time.



Most lenders in Canada require a cosigner to have a minimum credit score of 680 to 700. The higher your score, the better rates you can help the primary borrower qualify for. Anything below 650 and you likely won’t be approved as a cosigner by lenders.



It’s difficult to get out of a cosigned car loan in Canada but not impossible in some cases:

 

– The primary borrower may qualify to have your name removed after 1-2 years of consistent on-time payments.

 

– You can try selling the car to pay off the loan balance so there’s nothing left owed.

 

– The primary borrower may be able to refinance the loan in only their name with the lender or another company.

 

Without taking one of those steps though, you can’t just walk away from a cosigned loan obligation if the other person stops paying.



When cosigning for a car loan, the lender will require you to provide documentation to prove your identity, income, employment, and residency status. This usually includes:

 

– Valid Canadian ID such as a driver’s license

– Recent pay stubs or other proof of income

– Bank statements

– Details on other debts and assets

– Permanent resident card if you are not a Canadian citizen

 

You’ll also need to be present to sign the loan agreement and other paperwork.

Buying a car with another person instead of just cosigning the loan can be risky if you have bad credit. While it improves the chances of getting approved, you take on the legal rights and obligations of an owner. This means:

 

– The loan defaulting can still damage your credit.

– You share liability for accidents or tickets.

– For resale, any owners on the title must agree to and sign off on a sale.

 

If your credit improves later, refinancing into your own name may also be more complex. Consider alternatives like saving up or maintaining payments until you can qualify on your own.



No, full coverage insurance is not absolutely required by law for all cosigned auto loans in Canada. But most lenders will make it mandatory in the loan contract terms before approving a cosigned loan. Comprehensive and collision coverage protects the investment for the financiers if the car is damaged or written off. And ensures they still get money owed if it’s totaled and the loan isn’t fully paid off yet.



As a general rule, your total monthly car costs – loan payments, insurance, gas and maintenance – should be less than 10% of your gross monthly income. On just the loan payment alone, lenders ideally want to see no more than 5-8% of your total income going towards the auto financing. Having a cosigner can help you get approved if a lender feels the payment is too high compared to your earnings.

A standard auto loan term in Canada is between 24 and 84 months – or 2 to 7 years. The longer the term, the lower the set monthly payment amount will be making it more affordable. But you end up paying much more total in interest costs over the full loan period. When cosigning, carefully consider what loan term works best for your own budget if ever needing to take over payments. Don’t overextend yourself.

With a cosigned loan, the surviving cosigner(s) become responsible for the debt if the primary borrower passes away. The options include:

 

– Taking over the loan payments and keeping the vehicle.

– Selling the vehicle to cover the loan balance.

– Voluntarily surrendering the vehicle for auction if it has negative equity.

 

The loan must still be repaid per the original signed contract. Any insurance payout would go towards settling the financing first before beneficiaries receive funds.

Can I trade in a car with a cosigned loan in Canada?

Yes, a vehicle with a cosigned loan in Canada can typically be traded in at any time without penalty. The trade-in value applies towards the outstanding loan balance. If you owe more than it’s worth though, you may need to provide extra money to cover the difference before the lender releases the lien. Review all totals carefully at the dealership so there are no surprises later on any remaining amounts due.

If the primary driver stops making payments on a cosigned car loan, the lender will initially try contacting them. But very quickly the liability falls onto the cosigner(s) listed on the contract. Expect the loan company to contact you demanding payment. You need to either take over the installments or they can issue a repossession order to seize the vehicle for auction. Your credit score also risks damage from any missed or late payments.



You should avoid reporting a cosigned vehicle as stolen if the primary driver has stopped making payments or is refusing to return it in Canada. As a legal co-owner, police may see it as a civil dispute and therefore not consider it stolen property. Speak to the lender about options first. Voluntary repossession may be best to avoid additional legal issues. Your focus is no longer on the car itself but rather protecting yourself from the loan defaulting.

In Canada, current average interest rates on a cosigned auto loan are between 5% to 9% for terms of 24 to 72 months. With an excellent cosigner credit score above 700, you can qualify for the lowest advertised rates from major banks or dealerships, usually under 6%. Poor credit borrowers can still see 10-15% or higher even with a cosigner. Shop multiple lenders to compare approved rates.



The legal age to cosign on any loan or contractual financial obligation in Canada is 18 or 19 years old depending on your specific province. However, some lenders have internal policies requiring cosigners to be at least 21 years old regardless. They want to see a longer credit history profile for making large loan decisions.

Unfortunately no, you cannot add a cosigner to an existing car loan contract with a lender in Canada. The original signed loan terms are legally binding without option later to modify and bring in another party. To add a cosigner, you would need to apply for a new loan with the cosigner on the initial application, and use funds from that to pay out your current financing.

To prove your income level for a lender when cosigning for a car loan, the main documents you need are:

 

– Letter of Employment confirming job title, length of employment, salary and pay structure

 

– Recent pay stubs covering a minimum of 30 days

 

– Bank statements showing regular direct employment deposits

 

– Previous year’s T4 tax slip or current Notice of Assessment

 

Lenders want to verify your income is high enough to take over the full monthly payments if the primary borrower defaults on the auto loan.

Yes, it may be possible to voluntarily remove a family member who was a cosigner on your auto loan in Canada but it can be challenging. Requirements typically include:

 

– Having significantly improved your own credit score since originally taking out the loan

 

– Showing 12+ months of perfect on-time payments

 

– Meeting income qualifications on your own for the outstanding loan balance

 

If approved to remove the cosigner, they are freed from the legal liability while you become solely responsible for continuing repayments.

With voluntary repossession of a cosigned car in Canada, you return the vehicle to the lender before it’s forcibly seized. While your credit still takes a hit, it looks better than an involuntary repossession. However, most cosigned loans include language that they can still pursue the cosigner(s) for any loan deficiency – the difference between resale value at auction and the total outstanding loan balance. You will likely owe this amount.

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