If you have bad credit, chances are you’ve looked into getting a co-signer to help boost that score of yours. But, did you know that a co-signer actually does more than just boost your credit score? While the primary reason to get a co-signer is obviously to ensure that you get a loan, even if it’s a bad credit car loan, a co-signer can also help you meet the income level required to get that loan, and provide a source of guaranteed income. This works just like boosting your credit score does. The co-signer’s information will be taken into account and merged with your information. Combined, it will be enough to get a car loan.
Let’s look at each one of these in greater detail…
The Obvious: Credit Score
The most obvious way a co-singer helps out is by boosting your credit score. How is this done? Since your credit score is too low to get a (bad credit) car loan, a co-signer with a better score will be needed to help you sign those papers. Their credit score be added to your credit score, effectively boosting it enough to get you that car loan you need.
Here’s the thing though – if you get a co-signer to help out, he or she will also be financially responsible for the loan. Meaning if you decide to default on it, that unlucky co-signer will have to pick up the slack and pay off the rest of the loan.
Boosting your Income
There are other requirements when it comes to getting a bad credit car loan. One of the requirements subprime lenders look at is your income situation. Thankfully, a co-singer can help out with this as well.
No, a co-signer isn’t going to give you money or open up a direct line to his or her bank account for you. Instead, when your co-signer signs on with you, he or she will then be able to add his or her income to your own. The lender will then use both incomes in order to qualify you.
Keep in mind though, this only works if you’re married. In other words, the only person who would be able to help with this is your spouse.
Since you have bad credit, the subprime lender has to assume risk when it comes to helping you out with financing. Therefore, your co-signer needs to be sure that your loan will be repaid one way or another.
More importantly, lenders need to calculate your DTI (debt to income) and PTI (payment to income) ratios on the loan, and approve you for it. If the loan looks like it will take up too much of your income and pose a problem — or you can’t afford it — then the lender won’t approve you.
Therefore, a co-signer provides that guaranteed payment the lender is looking for. If you aren’t financially able handle the loan anymore (or default on it) then the co-signer will end up paying off the rest.
But, you shouldn’t have to worry about that if you are responsible and plan accordingly. A co-signer really is a great way to help boost your credit, along with the other factors that play into securing a car loan.