If you can’t qualify for a car loan on your own, you may add a co-borrower or a co-signer. While the intended result is to secure a larger loan and/or a better rate, a co-signer and a co-borrower are distinct entities. Each plays a different role in your car loan, something that both of you should know about before signing up for car financing.
Car Loan Co-Signer vs Co-Borrower
1. Purpose, Verification
You are enlisting the help of a co-signer when you have problems with your credit score. It may be too low and you would need to borrow his/her stellar credit to qualify.
Another case is when your income or wages are not enough for garnishment. This is one method a lender employs to collect any deficiency post-car repossession.
Lenders will verify your co-signer’s income and assets. They will also look into his/her employment and residence, whether he/she has deep roots in the community through his work or home.
You will need a co-borrower, often spouses, so you can take out a larger loan together. It may be that the loan is too large for you or your spouse to qualify for individually.
If your income falls short, combining it with your spouse’s income may help you meet the income requirement and a bigger loan perhaps. And if he/she has an excellent credit, the chances of getting qualified for car financing increase.
2. Ownership, Obligations
Post-loan closing, the co-signer is not expected to contribute to the car monthly payments. His/her role will officially start when you are in trouble with your payments. When you default on your car loan, your co-signer becomes legally responsible for repaying the loan.
Even when the co-signer ends up repaying your loan, he/she has no legal ownership rights to or security interests in the car securing the loan.
In the event you file for personal bankruptcy, you may be discharged from your debts or have surrendered the car for repossession but not your co-signer who will remain indebted to the car lender. More importantly, neglecting on your car debt will negatively affect your co-signer’s credit score.
The car becomes jointly owned by you and your co-borrower. Both of you are responsible for the loan repayment.
Should both of you default on your obligations, the lender may repossess your car. If you enter into bankruptcy, you may be protected from the lender’s efforts to collect money from you while the proceedings are ongoing.
Go over these aspects with your prospective co-borrower or co-signer carefully. For a more enlightened advice, consult a car loan expert.