Now that you've decided on the car you want to buy and you've agreed on a price, it's time to apply for the financing. If you're applying with a co-signer, both of your credit scores will figure into the lender's decision to grant the loan and the interest rate you will be charged. Your lender will consider the creditworthiness of both of you.
What Difference Does It Make?
If you have stellar credit but your co-applicant is not as fortunate, the lender must take into account the various scenarios that could take place in the future when making a loan determination. From the lender's perspective, he simply wants to ensure that the loan will be repaid under the agreed-upon terms. If there are two applicants, both are equally responsible for the debt. The lender must be certain that either of you could pay the loan alone.
What Are the Implications?
How the co-applicant's bad credit can affect the loan depends on a variety of factors, including just how bad his credit is and how good yours is. If you have an extremely high credit score, and your co-applicant's is marginally bad, you may not get the best interest rate that's offered, but you will likely get a good rate. If your credit score is marginal and your co-applicant's is low, you might face a high interest rate or the loan could be denied entirely.
Factors that can influence the credit decision include your length of employment, the nature of the ding on your credit -- bankruptcies are worse than a 30-day late payment -- and the age of the bad entry. If you have been with the same employer for several years, have a decent salary and your last bad credit entry is several years old, the low credit score may carry less weight, although it still will be considered. It will be helped by the co-applicant's good credit, and regular timely payments will improve your score for future purchases.
Where you go to secure your car loan could have an effect on the outcome. Loans through car dealerships typically are not the best way to go if you are worried about bad credit. Although you may get the loan, it will likely be at a higher interest rate. You have options, however. If you belong to a credit union or have a long-standing relationship with a bank, you may be able to get better terms for the loan. Banks and credit unions may take into account your long relationship with them and if you direct deposit your paycheck, with your permission, they can have the payment taken directly from your deposit, thus ensuring a timely payment and making you a better credit risk.
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