November 2018
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When You Need a Co-Signer
The advantages of having a co-signer for an auto loan

If it’s your first time buying a car, it is likely that you won’t have enough funds to pay for it in cash. If you are a young driver, you likely also won’t have the necessary credit history to support a financial institution’s decision to loan you the money necessary for a purchase. In these situations, or in situations where you may not be approved for a loan due to a poor credit history, you may want to seek out a co-signer to ensure that you have the transportation you need.  

What is a co-signer?

According to Investopedia, a co-signer is very much what it sounds like: An individual who signs on alongside you whenever you take out a loan to bolster your chances of being approved. Co-signers tend to be close friends or direct family because co-signing requires a great deal of trust and confidence in the primary borrower. Reason being, if a primary borrower should fail to make payments on a loan, the co-signer is financially responsible for fulfilling those obligations. 

Why enlist a co-signer?

Co-signing is a wise move if you’re a first-time borrower with no credit history or if you have credit problems that damage your ability to borrow money. A co-signer can make you more desirable as a loan applicant because the financial institution assumes less risk. The lender will likely focus on the co-signer’s financial history more than yours, and if they prove to be a viable candidate for a loan on their own, that increases the chances that your request will be approved.

Getting a co-signer for a loan also helps you out financially in different ways. According to Investopedia, the support of a co-signer will likely help you earn better terms for the loan, be it a lower interest rate or increased principle. If you remain diligent about paying on time, it will prove the means necessary to help increase your personal credit, enabling you to secure future loans without a co-signer’s help.

Who should I ask to co-sign?

If you’re a young driver seeking a co-signer for a first-time car loan, The Balance’s Justin Pritchard recommends that you start by asking your family. Parents or guardians are a great first choice for co-signers, and they’re often more willing to help you without having to stipulate your case or circumstances.

If you should need to ask a more distant relative, friend or person who is hesitant to help, Pritchard recommends that you are candid about your financial situation, demonstrate that you understand the terms of the loan for which you are applying and can show that you understand the gravity of the situation both for yourself and for your co-signer.

It’s also important that you know the risks you face, and not just financially. NerdWallet’s Amrita Jayakumar points out that flaking on your payments and leaving a friend or family member holding the bag for you can lead to the erosion of a healthy relationship.

If there is  someone close to you who you feel you can trust to co-sign for you, and if you have the confidence in yourself that you will be able to uphold your end of the bargain, getting a co-signer is a great first step to securing not just an automobile but a brighter financial future.



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Published by Central Bank of Kansas City
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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.  This is an advertisement.
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