A car loan cosigner is an individual who agrees to become equally responsible for the debt of another person which has been acquired for the purchase of a car. The cosigner is one with a good credit history who is willing to vouch for their friend or family member who either has poor credit history, or none at all. This person agrees to become responsible for the balance of the debt if the purchaser stops making payments to the lender.
A car loan may be taken out by a borrower who is interested in financing the purchase of a new or used vehicle. Traditional lending agencies for this type of loan include car companies, banks, and some automotive insurance companies. The borrower is usually required to put a certain amount of money down towards the cost of the vehicle, and makes monthly payments to the lending agency for the remainder of the loan. Most car loans are financed between three and five years.
To qualify for this type of loan, the lending agency first checks the credit history of the individual purchasing the vehicle. Credit history is a numerical rating assigned to every individual by outside rating agencies based on that person's responsibility with money and ability to repay debt. Factors that can affect one person's credit rating include whether he pays his bills on time, how much money he may owe to other agencies like credit card companies, and whether he consistently makes payments towards existing balances and successfully has paid them off in the past.
The car loan cosigner is typically required when the individual applying for the car loan does not have an established credit history or has a poor credit history. Young people beginning a purchase history separate from their parents for the first time typically do not have any credit history. They have not yet been in a position to have or pay a utility bill, may not have had a credit card for very long, and have probably never been required to repay any type of debt. When the lending agency does not feel that it has enough information about the applicant to make an informed decision regarding his ability to repay debt, the agency then requires a cosigner.
Individuals with a poor credit history may be required to provide a car loan cosigner because they have a past history of allowing loans to default. The lending agency in such situations is taking a risk by lending money to such an individual. It asks for a cosigner so that there is a greater measure of guarantee that the loan will be repaid.
The person who acts as the car loan cosigner also becomes responsible for the debt of the car in addition to the person purchasing the vehicle. If the purchaser becomes unable to make his payments, the lending agency will legally require that the cosigner begin to cover the debt. The cosigner can be held responsible for the monthly payments as well as any late fees and penalties assigned to the borrower while he was unable to pay on the loan.
The car loan cosigner often has a good credit history. He has demonstrated an ability and willingness to repay his own debt in a responsible and timely manner. Some cosigners may be asked to provide proof of their ability to repay the loan should the borrower default in the form of bank statements and already paid car titles. If a cosigner is required to provide collateral for the automobile loan in the form of a car title or other property, that property may be repossessed to cover the lender's losses if the borrow ceases to make payments on the loan. This can negatively impact the credit history of the cosigner, and cause his score to fall drastically.