What Do I Need to Co-sign on an Auto Loan?
Not everyone can qualify as a co-signer for an auto loan. If you meet the qualifications, however, you can help a friend or family member get approved for auto financing. The loan itself also helps the individual establish or build his credit history. Thus, if your income and credit history make you an ideal candidate for a loan of your own, don't be too surprised if someone you care about asks you to co-sign an auto loan in the future.
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Facts
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When an individual applies for an auto loan but cannot prove that she brings in enough income to afford the monthly payments or does not have a satisfactory credit history, the finance company may provide the individual with an auto loan anyway if a co-signer applies with her. A co-signer pledges his stable income and good credit along with the primary borrower's for additional security. The lender knows that, in the event the primary borrower is unable to pay, the co-signer can be held legally responsible for the loan. This added security makes the primary borrower a lower risk and often allows her to obtain an auto loan approval.
Significance
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As a co-signer, it is important that you have a good credit history. The lender reviews your credit history to check how responsibly you paid your debts in the past. If you always make payments to your creditors on time, the lender can be reasonably certain that, if circumstances result in you making the auto loan payments, you will honor your obligation. Auto lenders often pull a type of credit score known as the Auto Industry Option Score. This credit score place greater emphasis on vehicle related debts, such as past car payments. A repossession on your credit report may result in you not being able to successfully co-sign an auto loan for a loved one as this will drop your standard credit score, but result in significant damage to your Auto Industry Option Score.
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Features
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Your income plays a large role in your ability to co-sign. The lender may ask for previous pay stubs to verify that you have enough income to afford the additional car payments, should you be called upon to make them. The lender will then evaluate your current debts and compare those debts to your income. If your disposable income--the amount you have left over after paying your monthly bills--is greater than the amount you pay out each month, the lender is likely to consider you an ideal co-signer.
Considerations
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It is vital that you trust the primary borrower to make the loan payments on time before agreeing to co-sign his auto loan. Once you co-sign, the loan appears on your credit report. Each payment the borrower makes to the lender also appears on your credit report. Because the payment history of each of your debts has a significant effect on your credit score, one late payment or two could damage your good credit. Thus, you must evaluate whether the individual can be trusted to make the payments before helping her secure a loan approval by co-signing.
Warning
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Because the borrower's debt appears on your credit report, you may find it challenging to obtain an approval for new loans that you need. The reason for this is because your lender will see the co-signed auto loan on your credit report and consider it one of your debts--even if the borrower is making regular payments. Although you can inform your lenders that the auto loan is merely a co-signed debt, the possibility always exist that the primary borrower will default and you will be called upon to make up the payments. This may result in future lenders being wary of lending to you until the auto loan is paid off or your income increases.
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References
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