Do Co-signed Car Loans Help Build Your Credit?

Co-signed car loans do not have as large an impact on your credit as loans that you secure without the help of a co-signer. Even if you are the primary party making payments each month, your responsibility is lower, in the eyes of the lender, than if you took the loan yourself. The lender is not concerned with the name on the check. The co-signer will get credit for those payments at the same time you do. 

Why Use a Co-Signer?

A co-signer may be required by your lender. This occurs if your income is too low to qualify or if your credit score is too low to qualify. In either scenario, you must provide a co-signer who could qualify for the loan on his or her own. This person guarantees your loan, meaning he or she will continue to make payments if you are unable. Lenders like to use co-signers because these high credit individuals value their financial status too much to allow a loan to slip into default. They will often not even allow a late payment on the loan. As such, they keep track of the primary borrower and fill in where necessary to make sure loans are paid on time. 

Why Avoid a Co-Signer?

You may not have the option of being the sole borrower on a debt. If you do have the option, though, you will have to weigh the pros and cons. If your credit is only fair, you may realize you can secure a lower interest rate with a co-signer. You have to weigh this lower interest rate against the potential credit benefits of carrying the loan by yourself. Until you carry a large installment loan by yourself, you will always have a hole in your credit as far as a lender is concerned.

Alternatives to Co-Signed Loans

If you elect to be the primary borrower, there are some strategies to make your loan cheaper. The first is to add additional security through collateral. Most car loans use the automobile itself as collateral. You can also provide home equity, another car or even a stock certificate to increase the collateral you have on hold, making the loan less risky for the lender and bringing down your rate. Saving for a high down payment and high monthly payments will also make your loan cheaper. This allows you to pay the loan back faster; shorter loans have lower interest rates in general.

Removing a Co-Signer from a Loan

Borrowers who already have a co-signer on their loans may want to remove this person down the line. You can do this by refinancing or modifying the loan. To get a quote for modification, inform your lender of your intent to remove the co-signer. If this quote is too high or the lender denies you the opportunity to remove the co-signer, you can approach new lenders for the loan. Then, you can use this new loan to pay off the existing debt, relieving you of the co-signed loan and helping build your credit faster.