Using a co-signer to secure approval for your car loan

At any point in time, there are three financial situations all of us can relate to. The first one is having excellent or good credit, the second one is having poor or bad credit, and the third one is having no credit at all.

Now, if you relate to the first personal situation, it means that you manage your finances well and make payments on time. It is also easier for you to apply for a car loan especially when compared to the other two situations.

If, however, you identify with the last two situations, you probably already have or will have difficulties in getting a car loan application approved.

This is because, in the second scenario, the bank isn’t too keen on lending money to someone who isn’t likely to make repayments on time. In the third scenario, since there is no credit history available, banks may not want to take a risk by approving your car loan application.

So, what does one do in such a situation? Well, you get a co-signer, of course.

Who is a co-signer?

A co-signer is a third party who basically assures the bank that the loan will be repaid. If any case should arise where you may not be able to pay the loan, it is the duty of the co-signer to see that the loan is repaid. In fact, the co-signer is legally obligated to make this payment.

Most banks require co-signers who have either a good or an excellent CIBIL score.

When it comes to a co-signer, ideally, they:

• Should be creditworthy: If you have poor credit or no credit, you should ensure that your co-signer has good or excellent credit. Ideally, your co-signer should have a CIBIL score that is above 700. This way, the bank will be more likely to lend money to you.
• Should have stable employment: Your co-signer’s employment history shouldn’t be littered with multiple job changes within a short period of time. If this is the case, banks will think twice before approving your loan application since they will think that both you and your co-signer may not be able to repay the loan. So, a co-signer who has been in the same job for at least one year will work in your favour.
• Should be able to make payments: It isn’t enough for your co-signer to have a good CIBIL score and stable employment. They must also provide the bank with proof that they can make repayments if you default on the loan. For this purpose, your co-signer may have to provide copies of their income tax returns, bank statements, and any other document that the bank may require.
• Should be willing to pay the loan: Remember that your co-signer has to sign a document that makes them legally liable to repay your car loan if for whatever reason you are unable to do so. As such, it isn’t just a verbal agreement. So, if your co-signer is unwilling to sign the dotted line, the bank is unlikely to lend to you.

Is a co-signer the same as a co-borrower?

Sometimes people tend to use these terms interchangeably, but it is important to keep in mind that both of these terms are different. A co-borrower is borrowing the loan with you and is equally responsible for its repayment. They will own the vehicle along with you and will have their name of all documents.

A co-signer, on the other hand, doesn’t own the car and their name is not on any of the documents. They are, however, responsible for paying the loan if you can’t.

Also, keep in mind that if you do decide to co-sign a loan, your CIBIL score may dip initially, but if the installments are paid on time, it will not adversely affect you. In fact, it will enhance your creditworthiness.

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The advantages of using a co-signer

• Better rate of interest: Even if you have no credit or poor credit, you may still be able to get a loan to buy a car. You will, however, be charged a high rate of interest. So, this could put you in a situation wherein you end up owing the bank more than what the car is actually worth. In such cases, a co-signer will reassure the bank that the loan will be repaid. The interest rate will then be lowered making it easier for you to make payments.
• Helps you rebuild credit: A low rate of interest means lower EMI payments. Hence the chances of missing out on your payments decreases. This makes it easier to rebuild your credit.
• End up learning from people with experience: More often than not, having someone who has managed their finances well as a co-signer helps you learn from them.
• Motivation to make payments: When you look for a co-signer, you generally ask a family member or a good friend. This makes you aware of the fact that someone else’s credit is on the line and this acts as a motivation to pay.

At the end of the day, getting a co-signer is extremely beneficial since you can be guaranteed of a car loan at an affordable rate of interest. Before you decide on a co-signer though, keep the factors listed in mind.

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