Home > Auto Loans > Can a Co-Signer Lower Your Car Payments?

Comments 0 Comments

Imagine you’re out car shopping and you finally find what you think is a reasonably priced set of wheels … and then when the dealer pulls your credit, the monthly payment that seemed so affordable is no longer available to you. You might be offered a subprime car loan at 10% or even 20% interest, and you really need a car, but the interest rate just seems crazy-high. It feels even worse knowing most other other buyers are paying less than 5% (the current industry average is 4.4%, according to Edmunds).

Even though you can get financing, your poor credit may be costing you thousands of dollars. (You can see what poor credit can cost you over a lifetime with this calculator.) But you may be able to get a better deal if you get a co-signer. It’s not terribly common, and only certain lenders offer that option, says Edmunds senior analyst Ivan Drury.

How much can you save? If you financed $28,480 (the current industry average) at 4.4%, you’d pay $3,693 in interest (and payments would be $480 a month). If you financed at 10%, you would pay $8,802 in interest (with a $556 monthly payment), a difference of more than $4,000 over 67 months, the current average term. If the co-signer had excellent credit, you’d likely save more than that. Pentagon Federal Credit Union, which you can join for a small donation to a military charity, was recently advertising 2.49% for loan terms between 60 and 72 months. So it’s more than just a few dollars a month difference in payments.

Other Ways to Cut the Cost

Auto finance expert Matt Briggs said interest rates at some of the “buy here, pay here” dealers run all the way up to 20%. But even with the potential savings, co-signing may not be the best way to make the loan affordable. A couple of other factors make the high-interest loan even more expensive.

First is the term of the loan. Although loans now typically run more than five years, experts suggest terms of no longer than five years for new cars and no more than three for used. So, for the same payment in a shorter term, you are likely looking at a much more modest car. (On the other hand, compressing the time will reduce the difference in what you’ll pay in interest over the life of the loan.)

Briggs said the punitive rates are most often offered to people who are young and who have poor credit or no credit. But he sees co-signing for a lower rate as “a little of a double-edged sword.” He said that even though the co-signer is added to the loan, “I don’t know how much it helps your credit.” He sees it as potentially becoming an endless cycle, but conceded it may make sense when the person co-signing is a spouse with higher credit.

Before You Co-Sign

Drury said he thinks this kind of scenario is more likely to be parents helping children. “Or,” he said, “it could be a very, very good friend, but you had better hope they have a solid six years of employment lined up.”

And, for the co-signer, co-signing for a lower rate carries the very same risks as co-signing in general, which is to say it can be a very dangerous move for the co-signer, with all the benefits going to the primary borrower. As a co-signer, not only are you on the hook for the entire loan, but you may not be warned that the primary borrower isn’t making the payments on time. I know someone who co-signed for an employee so they would have a way to get to work and then got stuck with the repo on his credit!

Still, if you are a parent, it is going to be very difficult to watch someone you love spend thousands more than they would have to if you would just sign your name (and put yourself on the hook for the full amount of the loan). If you want to help, you can do so a couple of other ways.

One is to encourage your adult child to look into loans through local banks or credit unions. It’s possible he or she can get financing there; it can’t hurt to ask. And if no one, anywhere except the “everybody rides” dealer is willing to lend money, it’s time to learn about building credit.

One risk-free way is to simply give the adult child money to make a bigger down payment. That, too, will reduce his or her payments because less of the car’s equity will need to be financed, and it will not put your credit or finances at risk. (However, you should not consider giving money if you cannot easily afford it.)

Offer advice, rather than a signature. Although the average car loan is for more than $28,000, that’s an awfully big loan for someone who has little experience repaying debt or has poor credit. And reliable cars can be had for less. Perhaps driving a less-expensive car is an option while building credit. Understanding the difference between wants and needs — and learning to say “no” or “not yet” to oneself is likely to be more valuable to your kid than that shiny car left sitting on the lot. Just not today.

In the meantime, the borrower can learn how to work toward a stronger credit standing. Making those car payments on time every month, over time, will help them build credit. Tracking their credit scores as they go can help them keep tabs on their progress. They can see their credit scores for free on Credit.com, where they can also get an overview of their credit, and a plan to help them build it over time.

More on Auto Loans:

Image: kzenon

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team