Co-Signing a Car Loan in Canada: All your Questions Answered
If you’ve never gotten a car loan or a loan of any kind before then you'll want to consider finding a loan co-signer in order to qualify. But what does co-signing a car loan in Canada mean? And more importantly, how do you know who should be yours and what does it mean for the person who you get? By the end of this read, you'll know if you want someone to co-sign a car loan with you.
- What is a Co-Signing?
- Who should Co-Sign?
- Should you Always Have a Co-Signer?
- Reasons to Get a Co-Signer
- Being a Co-Signer
What is a Co-Signer?
Quite simply, a co-signer is someone who signs a loan alongside you, which means that if you default on the loan your co-signer takes on your debt instead.
Banks like this because it means there's less risk to their investment. If you’ve never paid a loan before they don’t know if you're trustworthy or if you’ll be able to repay the loan at all. A co-signer means that no matter what they’ll be getting their money back.
As you can imagine, if you’re going to ask someone to possibly take on all of your debt, it needs to be someone who has a lot of trust in you not to do that to them. Usually this means a parent or other close family member.
Trust is the requirement on your end, what the bank wants is someone reliable. Your co-signer should ideally be someone with a high credit score and good credit history. Anywhere in the above 700 range. This is something you should discuss with your co-signer before ever talking to the bank.
If your co-signer has a poor credit score then it might defeat the purpose and the lender might still reject your application, since the idea is to reduce risk. And to banks, low credit means risk.
Having a Co-Signer on a car loan in Milton does have advantages even if it’s not your first loan, Co-signers can also help improve your interest rates and the amount you can borrow if you yourself have a low credit score. And even if you don't, banks like them because they’re added insurance to a loan. The issue with that plan is probably a more personal one. Convincing someone to continue Co-signing your loans when it’s no longer required may push some relationships to the breaking point.
If you co-sign a car loan in Canada, it is possible to remove them from the loan by refinancing your car loan. If you refinance the loan with the same bank or possibly a different one, you may end up with a higher interest rate but you can specify that you’d like to remove the Co-signer, freeing them from any risk.
Remember though, even if you have bad credit there are still ways to finance a decent interest car loan without using a co-signer. Many lenders offer competitive interest rates for those struggling with bad or no credit, like us!
Qualify for loans: The main reason you would want to think about a cosigner is to get approved for a loan that you would ordinarily be turned down for due to your bad credit score or lack of prior lending experience. Having a cosigner is always beneficial to your chances of getting a loan approved, provided that your cosigner also has strong credit. However, because of this, you need a cosigner who has a lot of faith in you. If you default on the loan, it might seriously harm both your finances and your credit.
Build/Rebuild credit score: Having a loan is an important first step in establishing or re-establishing credit, and having a cosigner can make that happen. A co-signed car loan in Canada will put you on the right track to establishing solid credit which can be helpful. Especially if you're a young adult purchasing your first vehicle or you've had financial difficulty in the past and your credit has suffered.
Better car loan rates: Even if you are not in a dire financial condition where obtaining a cosigner is practically necessary, there are still advantages to doing so. When you can get a better loan, why apply for a decent one? Your chances improve if you have a cosigner, and you may find that you are eligible for more favorable conditions and lower interest rates than you would otherwise.
Situations where a Co-Signer Might be a Good Idea
You struggle to prove income: If your business or self-employed position has not been running for the last 2 years, you may be required to get a co-signer because the lender doesn't have enough financial information including recent credit history, to approve the loan. Seasonal workers and workers that rely on tips also struggle to prove a reliable source of income.
You're a student: When it comes to car loans in Canada, students are treated the same as anyone else. You still need some kind of credit history, have a decent credit score or be working towards one with an income. This is obviously very difficult for a lot of Canadians. The solution is often to co-sign a car loan in Canada.
You want to lower your car payments: Co-signers are such a big reassurance to lenders, that they'll offer you lower interest rates for it.
You were denied a car loan: If you've recently been denied a car loan due to your financial situation, a co-signer could be the thing you need to get approved. Click here to learn more.
A Word of Caution
All of this comes with one very important caveat: before you apply to co-sign a car loan in Canada, you should always make sure you're going to be able to pay it back. If you have a co-signer on a car loan, this is even more important. One of the worst things you can do to someone is to fail to repay a loan, which could result in all of that debt being placed on a loved one. To avoid this from happening, make sure you are prepared to repay!
Being a co-signer on a car loan is an opportunity to do some good and help out a friend or family member. Unfortunately, not all the facts are always made readily available to the co-signer which can leave them exposed in ways they didn't know was possible. If you're considering or about to be a co-signer on a car loan in Ontario, here are some things you should be aware of.
You are equally responsible for the loan: Even though the loan is in someone else's name, your name is also in the contract when co-signing a car loan in Canada which makes you equally responsible for paying back the loan (according to the lender). So, although you won't be the one making the payments, make sure you monitor the situation and guarantee whoever your co-signing with isn't missing any payments.
It's hard to get out of a co-signed car loan: It's quite difficult to remove yourself as a co-signer. The loan contract is binding and you'll need to go to great lengths to try to remove yourself from it. For a lot of lenders, you'll need to have a very good reason for removing yourself from the loan. So make sure you are fully committed when you agree to co-sign with someone!
You might not be notified of missed payments: Lenders are supposed to notify you if your co-signer misses a payment, but this isn't always what happens. Since it's a co-sign, if the car owner misses the payment, technically you did too. This can have a seriously negative impact on both your credit scores. This means you'll need to go the extra mile to ensure no missed payments happen.
Your credit score is impacted: As we mentioned before, your credit score will also change as a result of missed payments. It can count against your debt-to-income ratio and negatively impact your credit score for a little while. If you're planning on getting your own large loan at some point in the near future, consider this point for a while before deciding to be a co-signer.
Not everyone can co-sign: Co-signing a car loan in Canada is not a risk everyone can take. Certain criteria have to be met before you can do it. A co-signer must first have a good credit score according to VantageScore or FICO (670 or higher). Second, the co-signer must possess a debt-to-income ratio higher than 43% for several loans including auto loans.
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