How Much Does a Cosigner Help with Getting Auto Loans or Better Loan Terms?

A woman in a bright yellow dress drives a silver car.

Imagine you’re shopping for a new car and finally find a reasonably priced set of wheels that you like. But when the dealer pulls your credit, that seemingly affordable monthly payment is no longer available to you. Instead, you’re offered a subprime car loan at 10% or even 20% interest because your credit isn’t strong enough to get a better rate.

How much does a cosigner help on auto loans when you’re facing this type of situation? Get more information below to help you decide whether seeking a cosigner is the right option for you.

How Does a Cosigner on a Loan Work?

A cosigner is basically someone who backs the loan. They sign agreeing that if you don’t make the payments as promised, they will step in to pay them.

If you don’t have much of a credit history or your credit is bad or poor, lenders are typically hesitant to give you an auto loan. They perceive you as risky. Will you pay as agreed? There’s not enough data or credit history for them to make that call.

However, a cosigner with a long history of good credit is different. The lender is more likely to believe that this person willpay as agreed. So, if you can get a cosigner to back you, you might have a better chance of getting a loan or getting better terms.

How Much Does a Cosigner Help With an Auto Loan?

How much can you save? Imagine you finance $37,851, the average price for a new light vehicle in the United States as of February 2020.

The average interest rate as of the end of 2019 for new car loans was 5.76%. If you’re able to get that interest rate and a loan term of 72 months—that’s 6 years—you would pay a total of $44,742. That’s $6,891 in interest and a monthly payment of around $621.

If you financed at 10% without a cosigner for the same terms, you’d pay a total of $50,488 for the vehicle. That’s $12,637 in interest and around $701 in monthly payments.

This is obviously just an example, but you can see that a cosigner can save you a lot. In this case, it’s $80 a month and more than $5,700 total.

Cosigner Versus Co-Applicant

It’s important to note that having a cosigner for a car loan is not the same thing as having a co-applicant. A co-applicant buys the vehicle with you. Their credit history and income are used alongside yours to determine if you, together, can afford the vehicle. The co-applicant also has an equal share of ownership in the vehicle purchased with the loan.

A cosigner, on the other hand, doesn’t have an ownership share in the vehicle. Their income may also not be a factor in the approval. Typically, they’re along only to provide a boost in the overall credit outlook.

What Are Some Downsides of Having a Cosigner?

Most of the risks or disadvantages are held by the cosigner. If you don’t pay the loan, they could become responsible for it. They could also suffer from a lower credit score if you’re late with car payments because it might get reported to their credit too.

As a borrower, you might experience a few disadvantages in using a cosigner. First, you have to get someone to agree to this, and you typically want it to be someone with good credit. Trusted family members are the most common cosigners, but that could mean that they might want to have a say in what type of vehicle you get.

And if something happens and you can’t pay the vehicle loan for any reason, you run a personal risk. You could damage your relationship with the cosigner if they do end up having to pay off the loan or face damage to their credit.

So, Should You Get a Cosigner for an Auto Loan?

The decision is personal. Before you do anything, check your credit and understand where you are financially. That helps you know what your chances for getting approved for a loan are on your own and how much loan you might be able to afford.

Then, check out some potential auto loans and consider whether you should apply for them on your own. If you know your credit is too poor or you try to apply for a loan and don’t get favorable terms, talk to a potential cosigner. Be honest about your situation and have a plan to pay the loan on time each month so they feel more confident supporting you as you make this purchase.

The post How Much Does a Cosigner Help with Getting Auto Loans or Better Loan Terms? appeared first on Credit.com.

Source: credit.com

Should I Buy or Lease My Next Car?

Gas can make summer road trips expensive, but the right credit card can earn some of that spending back.

One of the most common questions I am asked as a financial planner is “should I lease or buy my car?” Leasing commercials on the radio make it sound like leasing a car is the only cheap, intelligent choice. However, it really depends on how you define “cheap.” If it means a lower monthly payment, then leasing is usually cheaper. If it means what you pay long term, though, leasing is usually not the best option.

What’s the Process of Buying a Car?

Buying a car is a relatively straightforward process. Essentially, you negotiate the price of the car at the dealership and you secure financing. After providing a down payment, you’d finance the entire remaining value of the car, usually through a loan from a bank or credit union. You would then make payments that include both principal and interest for a specified period of time. Once your contract is complete, and the loan or other financing is paid off, you’d own the car outright.

At that point, you could decide to keep it or sell it. If you sold it, you’d have to negotiate the sale to get the price you want. One disadvantage of owning the car is that thanks to regular wear and tear and other factors, you have no guarantee of what the car will be worth at the end of the financing period.

How is Leasing Different from Buying?

Leasing is a bit more complicated, but it’s basically just another method of financing a car. The difference is you aren’t financing the entire car—just the use of the car during the first few years of the car’s life. The payments you make would still consist of principal and interest, but only for the portion of the car’s life you’d be using up.

The biggest difference is that unlike buying a car, you don’t own anything once a lease is complete—and if you still needed a vehicle, you’d have to acquire another one. Typically, you can purchase the car for a pre-set price (known as the residual value) once the lease term is over, or you can give the car back to the leasing company and decide to either purchase or lease another vehicle.

Do You Have to Pay Extra Fees to Lease a Car?

Many advertised leases also require a down payment. If you’re short on cash, you can skip the down payment, but your monthly payment would be higher because you’d be financing more of the car. Also, keep in mind that you’re still responsible for the condition and mileage of the cars you lease. When you turn the car back in, if it isn’t in good condition or if you’ve driven more miles than your lease allows (around 12,000 miles per year), then you’ll have to pay extra.

When Is It Better to Lease Rather Than Buy?

Before you decide to lease or buy, you’ll also need to determine how many miles you drive per year and how long you like to keep your cars. If you are a high mileage driver (say, more than 15,000 miles per year) or you like to keep your cars for three years or more, you are most likely better off purchasing the car. If you don’t drive much and you prefer driving new cars, then leasing may be a better option for you.

Regardless of whether you lease or buy, you’ll need good credit to qualify for a low interest rate. So before you shop for a car, see where you stand: check your credit score for free at Credit.com.

Image: monkeybusinessimages 

The post Should I Buy or Lease My Next Car? appeared first on Credit.com.

Source: credit.com