Can You Refinance an Auto Loan with a Cosigner?

Auto loans are one of the most popular ways of financing new or used cars. Approximately 31% of Americans were using an auto loan to finance their cars as of 2022, while another 14% didn’t have a loan but planned to get one within six months.

With that said, you might be wondering, “Can I refinance an auto loan with a cosigner if I have a loan in place but are unhappy with the terms?” The short answer is yes. It’s possible to use a cosigner to refinance a car loan and get a better rate and terms than you would with just your credit history.

However, there are several factors to consider before you decide whether this is the right choice for you. Understanding all your options will help you find the best path for your personal needs and finances.

What is auto loan refinancing?

Refinancing is taking out a new loan that ideally has more favorable terms to repay an existing loan. When it comes to car loans, refinancing can be a great move if you can get better loan terms, lower monthly payments, and a lower interest rate.

You can change many aspects of it when you refinance your auto loan. However, carefully review the terms and details of your original loan before comparing the refinancing options. Generally, you can keep, add, or remove a consigner as part of the refinancing process, which can greatly adjust the loan terms.

How does adding a cosigner to an auto loan help?

It can be difficult to qualify for an auto loan that has favorable terms and rates if you have a low credit score or a limited credit history. However, with a cosigner that has a good credit score and established credit history, you are more likely to secure a loan with rates and terms that would otherwise be unavailable to you. Here are a few benefits of adding a cosigner to an auto loan.

Improved chances of approval

Lenders can label you a high-risk borrower when you have a bad credit score and history or a high debt-to-income ratio. Adding a cosigner to your auto loan assures the lender you can repay the loan, which can increase the likelihood they will approve your application.

Better interest rates and reduced monthly payments

Your credit score is not only essential for getting you approved for a loan but also for acquiring the best interest rates and terms. A cosigner with a good credit score (670 and above) and a high income can result in lower interest rates. This can lower the cost of your refinanced car loan over time as well as monthly payments.

Improve your credit score

Lenders consider you the main borrower when you add a cosigner to your auto loan. That means the loan will display on your credit report, which will naturally increase your credit score and history, provided you make on-time payments. If you have other loans or credit cards, adding another loan can lower your credit utilization ratio, further helping boost your score.

However, remember that your cosigner also bears the legal responsibility for the loan. Therefore, failing to make your payments on time can hurt their credit report and your relationship. Cosigners are usually close friends or family members, and they will want strong assurances that you can and will make on-time payments on the loan.

How to add a cosigner to your auto loan

People usually refinance their loans since their financial situation has improved and they are eligible for favorable terms. However, it might be difficult to find a lender to help you refinance your auto loan with a lower interest rate if this isn’t the case. Fortunately, adding a cosigner can help you get a better deal.

So, what does a cosigner require to qualify for refinancing your auto loan? Here are a few things your car loan provider will look at your cosigner.

Credit score

A good credit score is the first requirement for cosigning an auto loan. To be considered, your cosigner must have a healthy credit score, usually in the low 700s. Since most lenders take into account the cosigner’s credit score as well as yours, their higher score can help you get a lower interest rate when you refinance.

Payment history

Payment history shows lenders how individuals can handle their debts. Generally, you appear less risky to lenders if you have a history of consistent and timely payments.

Your cosigner’s payment history also affects the interest rate and terms you can qualify for with your new auto loan. If they have consistently made on-time payments, it can help you get better terms when you refinance your auto with a cosigner.

Income

Your cosigner takes responsibility for your loan payments if you default or are unable to pay. Therefore, their income must show they can pay back the loan on your behalf if you can’t make the loan payments for some reason. They will also look at your cosigner’s debt-to-income ratio to ensure they can afford the debt in case you fail to pay.

Background check

Most lenders conduct a background check to determine the liability of a cosigner. They will particularly look for money issues like financial fraud, evictions, and repossessions. Your cosigner must pass the vetting in order to qualify to put their name on your car loan.

When not to have a cosigner on an auto loan

Adding a cosigner to have an auto loan approved is a step that you should carefully consider before applying. Sometimes, it might not be the best decision for your needs and financial situation. Here are some instances when you might want to avoid having a consigner on your auto loan.

The car isn’t within your budget

Even when offered a lower interest rate, it’s best to completely forgo the car purchase if it isn’t within your budget. You might need to hold off on buying the vehicle until you save enough for a larger down payment. This will align the loan amount with your monthly budget and income.

Look for a used car at a lower price if you can’t wait to get a new one. Used cars are usually affordable, and you can get similar features as new vehicles without breaking the bank.

You expect conflict with your cosigner

A cosigner takes a great risk when they accept backing your loan and sign on the dotted line. They are responsible for the debt should you default or fall behind on payments. Your lender might also experience a negative impact on their credit score or potentially on their other finances if the lender decides to take legal action. Of course, this can hurt your relations, sometimes beyond repair. Conflict can also occur if the relationship with your cosigner spurs from reasons not related to the loan.

Wrapping it up

Using a cosigner when refinancing an auto loan can help you get a better interest rate, allow you to pay off your loan faster, and give you a chance to build better credit over time. A lender will be more willing to loan you money if your consigner has a high credit score and substantial income since they are assured of the monthly payments.

However, be careful when choosing a cosigner since this individual is financially tied to you until you repay your auto loan. It could damage your relationship if you fail to make payments and they have to pay them instead.