If your lack of credit history or a poor credit rating keeps you from getting a car loan on your own, you'll need a cosigner. In a sense, a cosigner lends you her good credit history until you build -- or rebuild -- your own. The lender bases the interest rate for the loan on the cosigner's credit score, so the interest rate is usually low if your cosigner has a solid payment history.
A cosigner takes on the payment responsibility for the car loan just like you do. If for some reason you can't or don't pay, the lender expects the cosigner to do so and report missed or late payments on his credit report as well as yours. Make sure your cosigner understands his financial obligation and the risk of cosigning for you. Full disclosure can eliminate surprises later if you run into a problem paying back the loan.
Lenders base their decisions on your credit history and score. This can makes it hard to get a loan if you don't have much history yet. You can also run into problems if your credit report already has dings on it. Missed payments, accounts in collections and too much credit-card debt can bring your score below the level where you can qualify for an auto loan at a decent interest rate.
Rate the Rating
Credit scores range from 300 to 850. A higher score earns you a lower interest rate, saving you money over the life of a loan. Lenders look at score ranges, or tiers, when classifying a score as excellent, good/average, or bad/poor. Excellent credit -- ranging from 740 to 850 -- wins you the lowest auto rate. The good/average tier, 680 to 739, usually qualifies you for a rate around 1 percent higher than that. A score below 680, known as a subprime score, means your rate usually goes up substantially, possibly 8 percent or more higher than the best rate. If your score falls below 620 you'll find it difficult if not impossible to get an auto loan unless you make a big down payment.
It's a good idea to check your credit scores and have your cosigner review hers before applying for a loan. The three major credit bureaus – Experian, Equifax and TransUnion – and myFICO.com offer this service. Knowing your score helps you determine whether the interest rate being offered is a good deal. You should always get a quote from both the dealership and your bank or credit union so you can compare rates and get the best deal.
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