How Is the Interest Rate Calculated on an Auto Loan With a Cosigner?

When you have a cosigner on an auto loan, your credit score won't be considered when calculating your rate.

When you have a cosigner on an auto loan, your credit score won't be considered when calculating your rate.

Making a large purchase like a car often requires you to secure a loan. But getting a loan at an interest rate you can afford can be difficult if you have poor credit or a short credit history. That’s why a cosigner can be a great asset to have when you’re shopping for a car loan.

Calculating an Auto Loan Rate

When you shop for an auto loan, your rate will be determined based on a few different factors. While most of the variables are dependent upon you and your cosigner, the lender you select will also factor into your rate. Some lenders may only have certain loan products available, so shopping around can help you find a better rate. Other than your lender, your auto loan rate will be determined by the amount of your down payment, the term of your loan and your credit score. Only one of these factors—the credit score—will be affected by your cosigner.

Auto Loan Rate and Your Cosigner

When you have a cosigner on an auto loan, your lender will use his credit information instead of yours when calculating your rate. Depending on your cosigner’s credit score and credit history, you may get a better rate than you would on your own. That said, in order to use your cosigner’s creditworthiness to lower your auto loan rate, your cosigner must be willing to sign a contract to pay the loan in the event that you default on your payments. Since the loan is essentially guaranteed by your cosigner, the lender will also use his income statements and other personal information to approve the loan and set the rate.

Your Down Payment and Loan Term

While your cosigner’s creditworthiness will play a big role in calculating your auto loan rate, you can still affect the rate with the size of your down payment. Typically, auto loan interest rates are lower if you have a larger down payment, and vice versa. This is because the higher your down payment, the lower the risk for the lender. Your loan term will also affect your down payment. If you choose a three-year term over a five-year term, for example, you will likely get a better rate.

Refinancing with a Cosigner

Once you’ve received an auto loan with a cosigner, you can begin building or improving your credit score by making your loan payments on time, along with any other installment loans or payments. As your credit improves, you may want to consider refinancing your auto loan. While your credit will not be considered if you have a cosigner on the loan, you may be able to refinance the loan without your cosigner to relieve her of her contractual obligation. Since your loan principle will also be lower, you may receive a better rate.


About the Author

Kristen Radford Price began writing in 2005 for her campus newspaper. She has served as a feature writer for the life-and-style section of the "Daily Herald," a contributor to "Utah Valley Weekly," an editor for a small publishing house and now as director of communications for an Internet company. Radford has a Bachelor of Arts in journalism from Brigham Young University.

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