Having bad credit is one thing, but what happens when you have no credit history to speak of? It's a problem that currently affects over 45 million American consumers, mostly young adults who haven't had any time to establish a credit history. It also affects people with existing credit histories that can't be scored because they're out-of-date or limited in scope.
If you're looking to purchase a new vehicle without an established credit history, you might find it very difficult to find a willing lender. In this case, having someone who can vouch for your financial well-being can be the key to getting the new vehicle of your dreams.
How it Works
When it comes to borrowers with bad credit or no credit, most traditional lenders are only willing to take a chance if another creditworthy person vouches for that borrower. Even subprime lenders may be hesitant to make a deal unless you have backing. This is where cosigning comes in.
The process of having someone cosign your auto loan is relatively straightforward. You simply need someone who has good credit (preferably in the "prime" or "super prime" range) and the willingness to back your financial worthiness. For the cosigner, agreeing to the process essentially means giving the lender their word that you'll reliably and completely pay off the loan amount.
Advantages of Using a Cosigner
Having a cosigner by your side can do more than guarantee an otherwise difficult loan approval. Your cosigner can also help you qualify for an auto loan with more favorable loan terms, including a lower interest rate. This means you could save thousands of dollars over the course of your loan simply by having someone cosign the loan.
A cosigned auto loan can also be an excellent instrument upon which you can build up your credit, as long as you make all of your payments on time and in full. After you've successfully paid off the loan, you have a relatively strong foundation you can use to not only fortify your credit, but also be approved for loans that you might not have been able to qualify for earlier.
Don't forget that there's plenty you can learn from your cosigner, including how to effectively manage your credit and make smart financial decisions that leave positive impacts on your credit score and credit history.
Understanding the Risks
Having a cosigner on your auto loan can be akin to getting into an intimate relationship. Once the cosigner signs on the dotted line, that person's financial well-being becomes intertwined with yours. As long as you make your payments on time, there's usually nothing to worry about. However, falling behind on payments or defaulting on the loan altogether could have serious consequences for that person's credit, as well as yours.
Not only can missed payments or a default tank your cosigner's credit score, they could also wind up on the hook for the remaining loan amount. If the collection agencies can't pursue you, then there's a good chance they'll go after the cosigner instead.
It's no wonder that many people who need a cosigner usually ask spouses, parents, other family members, and exceptionally close friends -- people who are intimately involved in that person's life in one way or another. If someone close to you agrees to become your cosigner, it's important for that person to understand their responsibilities before signing on the dotted line.
Keep in mind that having a cosigner isn't the only way to get approved for an auto loan if you don't have a credit history. Offering a larger down payment can also increase your chances of being approved for an auto loan, in some cases. Some lenders may also be willing to work with you to secure a reasonable auto loan, depending on your financial situation. Talk to a lender who offers bad credit financing to find out more information on your options.
