How Does a Co-signer Affect the APR of a Car Loan?

by Michael Roennevig, Demand Media Google

    Taking out a car loan can be an expensive business. If you have bad credit, you could end up paying interest with an annual percentage rage of over 25 percent. This compares poorly to typical rates of well below 10 percent. Those with an excellent credit profile and a decent deposit can sometimes even access interest-free credit to buy a vehicle. If you've been quoted a high price for auto financing, you might be able to get your rate down by persuading a co-signer to guarantee your loan.

    Lower Interest

    There's a good chance the amount of interest you'll be asked to pay on your loan will do down if you can persuade a co-signer with a good credit profile to back you. The lender providing your credit will take the credit score of your co-signer into account when assessing your application for financing. If your credit is poor, you won't be able to get the APR down as low as for someone with good credit, but you should be able to save some money.

    Equal Responsibility

    Your co-signer will become fully and equally responsible for the repayment of your loan when she agrees to become your guarantor. This means that if you were to get in a position where you were unable to repay your loan, your co-signer could have to pay the whole lot off. Repayment would still be your co-signer's responsibility even if you were to be declared bankrupt. It goes without saying that this would not have a positive effect on your relationship with your co-signer.

    Credit Report

    While finding somebody willing to back your loan could work well for you, your co-signer isn't likely to get a lot of benefits from the arrangement. The loan will be added to your co-signer's credit file, which will have an immediate impact on her debt-to-credit ratio. This could make it more difficult for your co-signer to get credit in the future. If you default on your loan, the fact that your account is in arrears will also show on your guarantor's credit record.

    Default

    If you were to default on your payments, your creditor would be able to chase your co-signer for any money owed. In some states, creditors are allowed to pursue a co-signer without first having approached the primary account holder. Your guarantor could even be sued or have money garnished from her wages if you were to run away from your loan.

    About the Author

    Michael Roennevig has been a journalist since 2003. He has written on politics, the arts, travel and society for publications such as "The Big Issue" and "Which?" Roennevig holds a Bachelor of Arts in journalism from the Surrey Institute and a postgraduate diploma from the National Council for the Training of Journalists at City College, Brighton.