If someone is ready to buy a car but they’re not quite financially qualified, they can get someone to cosign their car loan. When someone is cosigning for a car loan, they also become legally liable for the amount of that loan, and they serve as extra security for lenders who are unsure about whether it’s safe to lend to a particular buyer.

What Does it Mean to Cosign for a Car Loan?

When a consumer is trying to obtain a car loan but isn’t financially qualified, a person who is more qualified can come in and offer to cosign the loan. This makes them completely legally responsible for the amount of the loan if the borrower is not able to make payments or pay it back.

What Qualifies Someone to Be a Cosigner for a Car Loan?

A cosigner for a car loan usually has a better credit score than the primary borrower. The person also often has a lengthy credit history, which proves that he or she has a history of paying back money borrowed and is a safe person to lend to.

Why Would Someone Need a Cosigner?

Cosigners are important because they help people obtain their first loans, which can help them start building their credit history. Once a person has a good established credit history, they can borrow on their own without a cosigner in the future.

How Does Someone Cosign for a Car Loan?

When a borrower is working with a cosigner, both the credit history of the primary borrower and the cosigner will be checked. Then, once approved, both the cosigner and primary borrower will sign the terms of the loan agreement, making them both legally responsible for the loan. The primary borrower will then become liable for making regular payments, but if payments are missed or the primary borrower defaults, the cosigner must take over making payments for the loan.

If someone needs a bit more financial credibility in order to obtain a car loan, it can help for them to have a cosigner. By understanding the financial risks (and potential rewards), cosigners can help make the process of borrowing money to purchase a car more secure for both a lender and a borrower.

Sources: Birchwood Credit Solutions, Cars Direct, Money Crashers, The Balance, CFPB