Cosigning a Car Loan: What You Need to Know (2024)
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it's no surprise if you're looking at a car loan but expect you need a cosigner or a family member has asked you to cosign for them.
The average new car loan in Canada is now over $50,000! Cosigning is on the rise, and we're here to help sort out if it is the right decision for you.
You may wonder, "What does it mean to cosign a car loan?" or "What are the potential consequences of cosigning a loan?" This guide answers the questions you have about cosigning an auto loan in Canada.
Keep in mind
- Adding a cosigner to your car loan can increase your likelihood of approval or better rates and terms.
- Cosigning a car loan can positively and negatively affect your credit score.
- Both parties are equally responsible for the car loan repayment.
- A strong level of trust between the cosigner and the primary borrower is vital. The arrangement can either enhance or challenge your relationship.
- Getting out of a cosigned loan can be tricky, but it is possible.
What does cosigning on a car mean?
Cosigning an auto loan means adding a trusted person to share joint responsibility for the repayment of your vehicle.
You might choose to do this because you still need to develop credit, or your credit score is low and considered too much of a risk to the lender. Adding a co-signer to your loan builds a sense of trust with the lender that the loan will be repaid either by the primary borrower or by the co-signer. This can mean approval when the loan would have originally been denied or better terms and interest rates.
Watch out!
Both parties will have their credit score impacted, so it is crucial to understand the risks and rewards before jumping into an agreement that can have financial consequences.
Thinking about a car loan? It pays to compare first:
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How does cosigning a car work?
When cosigning a car loan in Canada, you and the primary borrower are both responsible for the loan, meaning you'll both have to fill out a loan application. Even though both people will be responsible for the debt, the primary borrower owns the vehicle purchased with the loan.
The amount, interest rate and repayment term will vary depending on the primary borrowers':
- Credit history
- The type of loan (unsecured or secured)
- The vehicle's age and condition
- The specific lender (Bank, Dealership, Online Lender)
In most cases, anyone with good credit and financial stability can cosign for the primary borrower, regardless of their relationship. High trust levels between both parties is essential, making family and close friends the most common cosigners. Think long and hard about cosigning if you aren't willing and able to buy the vehicle yourself.
What is required as a cosigner of a car?
Most lenders will need both parties to provide:
- Proof of employment (current and previous employers)
- Proof of income (the self-employed need tax returns for the past three years)
- Consent for a credit check (this can temporarily lower your credit score)
What income level is required for you to cosign a car?
In Canada, there isn't a fixed income a cosigner must make to be able to assist with the car loan.
Lenders will review their ability to cosign by evaluating primary factors: credit history, debt-to-income ratio and any prerequisites specific to the bank, dealership or online lender you're working with.
Are you feeling unsure if you fit the criteria to be approved? Increase your chances by getting pre-approval for a car loan or speaking directly to one of their representatives about their requirements.
Can you have multiple cosigners?
Yes! In Canada, most lenders let you have multiple co-signers for your used car loan.
Each cosigner must meet the lender's eligibility requirements and agree to share responsibility for the loan. It's essential for all involved in the loan to understand that each co-signer is jointly liable for the entire loan amount.
If the primary borrower defaults on the loan, the lender can turn to any co-signer for the total amount owed.
Is co-signing a car a good idea?
When co-signing a car in Canada, there's no one-size-fits-all answer.
For the primary borrower, having a co-signer can be important for getting approved or securing better terms and a lower interest rate.
As a cosigner, if the primary borrower fails to make payments, you'll be responsible for covering the balance. Cosigning can affect your credit score and financial stability, so a good trusting relationship with each other is essential.
Cosigning a car lease is a personal decision that only those involved can determine whether it's a good idea. If you feel torn if cosigning will impact your financial goals, reviewing the loan first with a financial advisor can boost your confidence to make the decision best for you.
What are the benefits of having a cosigner?
You might have chose to have a cosigner before approaching your lender, or the lender’s underwriters could have suggested a co-signer as a stipulation before denying your application. As the primary borrower, there are several points that directly benefit adding a cosigner to your car financing in Canada.
- If you have low credit or a hard time proving your income (self-employed), the likelihood of loan approval will increase.
- You can save money over the loan lifespan as many lenders can offer lower rates with the added repayment security.
- A higher loan amount is possible, meaning you can get added features or a more expensive vehicle.
- The repayment period will likely be more favourable, giving you options for less expensive monthly payments for longer or a shorter term for less interest across the loan lifespan.
- After the approval of the cosigned loan, ensuring timely payments can boost your credit score, making it easier to secure a loan on your own in the future.
What are the risks of having a cosigner?
With all the enticing benefits of adding a cosigner to your car, it's easy to forget that there are risks to consider for the primary borrower as well.
- Late or missed payments will damage the credit score of both you and your cosigner.
- You might be approved for a loan amount outside of your means, causing a stressful debt burden.
- If both parties can't repay the loan, the vehicle will be repossessed, impacting the primary borrower's ability to get to work or fulfill other daily responsibilities.
- A high level of communication from the primary borrower to the cosigner is essential as the lenders don't provide information to cosigners as they do for primary borrowers.
- The relationship between the primary borrower and the cosigner can be damaged if the trust that the payments will be made is broken, forcing the cosigner to spend their money while also harming their credit.
Pros and cons of cosigning a car loan?
It is a big decision if being a cosigner is the right choice for you. Weighing both risks and rewards can be a great way to help you in your decision.
Pros
- Strengthen your relationship with the primary borrower by supporting them in a time of need.
- Your credit score can improve (along with the primary borrower’s) if the payments are made on time.
- With better credit than the primary borrower, you may be able to negotiate a better rate or term which can help you both.
Cons
- Taking on legal responsibility for the repayment of the car if the primary borrower can’t pay, may be a large financial burden.
- Defaulted or missed payments from the primary borrower can negatively impact your credit score and damage your relationship.
- Even though you have financial responsibility, you won’t have any control over the vehicle.
If you're considering a car loan, shopping around can help you save.
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Does cosigning a car loan affect your credit?
Cosigning a used car loan can positively and negatively affect your credit score for both the cosigner and the primary borrower.
Making timely payments consecutively will improve credit scores, but missed or late payments can negatively impact credit scores. The debt-to-income ratio should also be considered for both the cosigner and the primary borrower, as the car loan can increase this, negatively affecting credit scores.
Good to know
In Canada, there isn't a set credit score needed to become a cosigner. Most lenders will look for a score of at least 650(+) and your financial history.
Does cosigning for a car affect buying a house?
A car loan can greatly impact both the primary borrower and the cosigner if they are trying to buy a house. It is essential to review your upcoming goals and if the risks below have been considered before committing to the loan.
- Missed or late payments from the primary borrower can bring down both parties' credit scores, making it more challenging to secure a mortgage.
- Don't overlook debt-to-income ratios. Many banks and financial institutes will use the ratio to determine if they will approve a mortgage and for what amount.
- The cosigner could have to dip into the home's down payment to cover any missing car installments the primary borrower can't make.
Do you have rights as a cosigner for a car loan?
If you're considering cosigning a car lease or loan in Canada, understanding your rights and responsibilities is a must.
As a cosigner, you will be equally responsible for the loan repayment, just as the primary borrower will. With this legal obligation, you have the right to have the documents along with the exact terms and conditions of the loan.
If you change your mind after cosigning, some lenders have an option that allows you to request ‘removal from liability’ depending on the financial health of the primary borrower.
How do you remove a cosigner from a car?
Removing a cosigner from a car loan isn't impossible in Canada, but it can be tricky and will also depend on the loan's lender. To help you, we have mapped out possible avenues to consider when wanting to remove a cosigner from your loan:
- Paying off the loan: Assuming the primary borrower now has the means to pay off the loan in full, doing so as a lump sum would end the loan for both parties.
- Refinancing: If the primary borrower's financial situation has improved, they could qualify for a new loan on their own. This new loan can then be used to pay off the cosigned car loan and release the cosigner of their responsibilities.
- Contact the lender: If the car loan is in good standing, the lender may have a policy that allows them to remove the cosigner from the original loan.
Adding a cosigner to a car loan can be a great way to help a loved one secure a reliable mode of transportation that enhances their life while strengthening their credit. After objectively reviewing the risks and rewards, both parties can confidently decide if cosigning a car loan is the right decision for them.
By setting clear expectations and communication, cosigning can be a positive experience for everyone involved.
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