Do I Need a Cosigner to Refinance My Car? Learn How Someone with Established Credit Can Help
Applying for a car loan or refinancing is a major step for many adults and may be one of the largest monthly payments that you have in your budget. As in any situation when you apply for credit, having a higher credit score will qualify you for better terms on your refinanced car loan.
If you don't have a strong credit history — or any credit at all — a cosigner may be able to join your loan application and use their stronger credit history to make the loan's payments more affordable.
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While you can use a cosigner for an initial credit application or for a refinance, it is not a requirement.
In some cases, a lender will not approve a loan for someone with a low credit score, which would make a cosigner necessary, but loans usually do not require a cosigner in other situations, especially when the applicant can show proof of monthly income and has a credit history.
What Is a Car Loan?
A car loan is an amount of money you can borrow from a financial institution to cover the cost of buying a new or used vehicle. The loan will have a contract with set terms that you and the lender agree upon, such as the loan amount, the number of months it will take to repay the loan, and the interest rate.
The lender will offer terms after reviewing your credit application, which you can complete in advance or at the dealership at the time of purchase. Either way, the lender will decide to offer a car loan based on your creditworthiness.
Once you sign the contract, you will begin the repayment process. Generally, the lender will give you a consistent payment amount for the life of the loan, which combines principal and interest to make up a monthly payment.
If you have a strong credit history and a high credit score, the interest rate of the loan may be lower, leading to smaller payments than those for a borrower with a lower credit score or poor credit history.
What Does It Mean to Refinance a Car Loan?
Refinancing a car loan means you are replacing your original loan with a new one to pay it off. You then start making monthly payments toward the refinanced loan. You might decide to refinance in order to lower your monthly payments, reduce interest rates, or pay off your debt more quickly.
For instance, if interests rates for loans have improved since you got your first car loan, you may want to refinance to take advantage of the better rates. Additionally, if you had bad credit when you first took out your loan, you may refinance your auto loan with a cosigner to try to get a better deal.
Who Should My Cosigner Be?
Your cosigner should be a trusted individual (with better credit than yours) who agrees to share the responsibility for the loan. A cosigner will have their credit checked for the loan application and will have the debt of the auto loan added to their credit report.
In many cases, a cosigner could be a family member, such as a parent or grandparent, or a trusted friend with a strong credit history. The cosigner should have the ability to get a favorable interest rate on the auto loan and, if you make the payments on time, will build even better credit as the loan is paid back.
While the cosigner should feel comfortable making the loan payments if you can't, you should still feel certain that you can hold up your end of the deal.
What If I Have Bad Credit and No One Who Can Cosign with Me?
In most cases, having bad credit and no cosigner won't deliver a good result when it comes to getting a car loan or refinancing. In order to qualify for a loan, you may have to make a large down payment or work with a subprime lender who can (and most likely will) give you a massive interest rate on the loan. This may be fine if you're looking to build credit and have plenty of money coming in each month to cover the inflated payments.
Another option is a Buy Here Pay Here program, which typically does not require any credit history. These programs have some requirements for borrowers, typically proof of income at a certain level, but can help to build credit as long as the dealer reports payment activity to the credit bureaus. Most often, these programs are looking for individuals who are employed and need to build credit.
If you are unemployed, you will have to show proof of income to qualify for a loan, and a larger down payment may also be part of the process. As with subprime loans, these programs usually involve high interest rates.
What Is the Refinancing Process for an Auto Loan?
Refinancing a car loan can be quick and painless if you take the proper steps to prepare for the application. When researching the prospect of a refinance, you should take a few steps before applying for a new loan:
1. Know Your Credit Score
Your credit score is critical to the car refinance process, as it tells potential lenders your creditworthiness and will dictate the terms of your new loan. All three credit reporting agencies — Equifax, TransUnion, and Experian — use different calculations to determine your credit score, so your score can fluctuate slightly among the bureaus.
It is important to get your credit score from each reporting agency, as your financial institution can use any of the three to make a decision on your credit application.
2. Make Any Corrections on Your Credit Report
Your credit report is a record of your borrowing history and makes up your credit score for all three major agencies.
You should resolve any errors on your credit report before you begin applying for a refinanced auto loan so that the lenders have the most updated information when deciding on your new terms.
3. Gather Your Personal and Financial Information
In order to refinance your car loan, you will have to provide a good bit of information to any potential new lender. Your 10-day payoff amount from your current lender, personal data including name, address, and Social Security number, and employment and income information will be required, as well as details about the vehicle that is being refinanced.
Your lender will likely ask for paystubs, W-2 forms, and other documents showing your income along with proof of current car insurance coverage. If you refinance with a cosigner, they will also need to provide their information.
4. Apply to Get Interest Rate and Term Information
Applying for a car loan is a lot like applying for a mortgage — you can usually apply for several auto loans within a short time, typically two weeks, and see the effects of just one hard inquiry on your credit score.
This allows you to shop around to find the best possible interest rate. Some of the terms that could affect your decision include the need for a down payment, the monthly payment amount, the length of the loan, and the interest rate.
5. Choose the Right Car Loan and Monthly Payment for You
After gathering information from a few lenders, you can choose the right new loan for you or decide to stay with your current one. Some factors, such as the payment due date or how to make a monthly payment, can be determined after you have found the best refinance loan.
Some new loans may give a grace period before repayment starts, giving you a month or more without a car loan payment as part of your budget.
How Can I Add or Remove a Cosigner from My Auto Loan?
Whether you qualified for an auto loan without a cosigner or had a cosigner when purchasing a vehicle, you can add or remove one by refinancing the loan. In this process, you would be applying for a new loan — either individually or with a cosigner — and would then begin seeking credit from financial institutions in the same way as for the first loan. Another option to remove a cosigner involves asking the lender about a cosigner release.
When Should You Refinance a Car Loan?
Refinancing can help you take advantage of your improved credit, add or remove a cosigner, get out of a bad loan with unfavorable terms, or reduce the monthly payment for the car loan. The right time to refinance a loan will vary depending on several factors, such as:
Is the loan current? If you have not missed any payments on your auto loan, the account is in good standing. Missed payments can negatively impact your credit score and your ability to qualify for a refinancing loan.
Has your credit improved or are you looking to add a cosigner? You should only consider refinancing if you have had positive changes to your credit score, meaning you would be able to qualify for better terms and a lower interest rate, or if you are adding a cosigner with a strong credit history.
Can you get better terms? If you are trapped in a loan with high rates, refinancing can help to save money on the monthly payment. Adding a cosigner (if there was not one on the original loan) can also help you get a better interest rate, particularly if the cosigner has a strong credit history.
Do you have equity in your current loan? If a car is worth more than you have left on your loan, a cash-out refinance can give you access to that equity and all the benefits of a refinance. This may help you get cash for unexpected expenses or for travel.
Is there another incentive to refinance with your current lender? When you have a preexisting relationship with a financial institution, there may be an incentive program that would lead you to want to refinance with the same institution. Sometimes, a lender will offer better terms for longstanding customers or to extend the life of the loan.
There is no set time to refinance a car loan, but if you can take advantage of your current situation by paying less per month and less over the life of the loan, consider taking on a refinance to save money.
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