Nothing puts a damper on car shopping like being turned down for an auto loan, but that doesn’t mean you don’t have other options. But some options, like charging a hefty down payment to a credit card or paying exorbitant interest to a buy-here, pay-here dealer, can make a difficult financial situation worse. A better choice is to find a co-buyer — aka co-borrower — or a cosigner: Either one can help strengthen your loan application.
Here’s what you need to know about the difference between a co-buyer versus a cosigner, so you can decide the best way to get approved for a car loan.
What Is a Co-Borrower?
A co-borrower is a co-buyer who serves as a co-applicant on a car loan. “A co-borrower is basically an equal buyer of the car,” said Korey Adekoya, business development manager at Shabana Motors in Houston. “That means they receive all of the benefits of and responsibilities of car ownership. They have the same rights to use the vehicle, but they’re also the on the hook for payment of the loan.”
As partners in the purchase, both co-borrowers sign all the documents associated with the loan and the sale. These typically include a sales contract, finance agreement contract, car title and car registration.
What Is a Joint Applicant?
Joint applicants are co-buyers who apply together for a loan on a car they’ll own together. The lender looks at the joint applicants’ combined financial and credit information and treats the applicants as a single borrower. With a joint applicant, you can increase the amount of available income to repay the loan and improve the debt-to-income ratio.
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What is a Cosigner?
A cosigner lends their good credit to the primary signer on a car loan, guaranteeing the lender or creditor that they’ll pay if the borrower doesn’t. The cosigner guarantees the debt and can be legally responsible for making car payments, plus late fees or collection charges if the borrower defaults on the loan.
Does a Cosigner Own the Car?
Unlike a co-buyer, a cosigner has no ownership rights to the car. “They have to take the risk, but they’re not receiving any of the benefits,” Adekoya said.
Insurance requirements vary by state and insurance company. In some cases, the lender might require that both cosigners and co-borrowers be listed on the auto insurance policy, said Certified Financial Planner Joel Ohman, founder of Car Insurance Comparison.
But even if the lender doesn’t require the cosigner to be on the auto insurance policy, it’s probably the best idea. A cosigner should be listed on the primary signer’s policy as a driver, and perhaps as a named insured, said Charlotte Burr, owner of the AZ Insurance Team in Tempe, Ariz.
Co-buyers have different insurance requirements than cosigners. They should be listed on the policy that has the financed vehicle insured even if they live in separate households, Burr said.
Whether you’re better off with a cosigner or a co-buyer — aka co-borrower — depends on your plans for the car and the risk tolerance of the individual you ask to cosign your application or apply jointly with you.
Having a co-buyer works more in your favor in terms of financing because you get the full power of the co-buyer’s income and good credit. But the boost in borrowing power comes at a price, especially if the co-buyer is someone other than your spouse. The co-buyer’s rights to the vehicle allow the co-buyer to take possession of the car if you fail to pay — and even if you don’t, because you’re equal owners — and you’ll need the co-buyer’s permission to sell the car later.
A cosigner has no ownership rights but might be harder to find. In addition to being responsible for the loan balance and fees, creditors can come after the cosigner without trying to collect from you first, possibly subjecting the cosigner to wage garnishment and lawsuit — and your default might land on their credit report. That’s a high price to pay, considering the cosigner can’t take possession of the car like a co-buyer can.
Whichever you choose, getting help with financing can help to improve your credit. You and your co-buyer or cosigner will be equally responsible for repaying the loan, and the payment history will appear on both of your credit reports, according to information on the Experian website. Making your payments on time is a great way to show appreciation for the person who helped you buy your car and ensure that when you’re ready to trade it in, you’ll qualify for financing on your own.
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