Auto Loans for Students: How a Cosigner Can Help

Auto loans are some of the highest-limit installment loans available. Other than mortgages and student loans, auto loans are the largest form of debt most borrowers will ever assume. With very large loans, a borrower needs to have a high income, low debt sum and very good credit to secure the right deal. Borrowers who do not fit this profile can opt for a cosigner. If a cosigner fits these specifications, then the borrower will have the best chance at a good loan.

Meet Income Requirements

For students and young people in particular, income requirements can be a huge hurdle to getting an auto loan. The same is often true for military personnel. Without a high enough income, a borrower cannot show a lender how he or she plans to meet monthly payments. Most auto lenders will  have a minimum income requirement for each level of loan. If a borrower doesn't meet it, though, the borrower can add a cosigner who does. For example, a student can ask a parent to cosign on the loan. The parent's salary will be used as the sole salary determining how large of a loan the student can receive.

Lower Debt-to-Income Ratio

A person with a high amount of debt will have trouble qualifying for a loan despite having a high income. This is because the lender is looking at a debt-to-income ratio. A person making $100,000 a year may seem to have a lot of spendable cash. However, if that person is a doctor with $50,000 a year in student loan payments, then the income is of less relative value in the eyes of the lender. In that example, the doctor could add a cosigner who had relatively low debt compared to his or her income. The result would be a change in the total-debt-to-total-income ratio, and the lender would be more likely to extend a loan.

Raise Credit Profile

Borrowers with bad credit are the most common users of cosigners. A lender will not make a loan to a person who has defaulted on a previous auto loan or has a record of missed payments. The lender will, however, allow this person to be listed as a cosigner on a loan with another borrower who has a stellar credit score. This is common with husband and wife teams in which one person has much lower credit than the other.

Provide Added Security

Ultimately, all the lender is looking for is assurance against default. The likelihood that one party will default on a loan is much greater than the likelihood that both parties will default. The cosigner is on the hook for the exact same amount as the primary borrower on a cosigned auto loan. While a student may not have the wherewithal to understand the implications of default, a parent usually will. That parent will not compromise his or her personal credit if the student cannot make payments on the loan. Strong applicants who apply to be cosigners care very much about their personal credit scores, and they will typically keep a loan from default.

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