Quick Facts About Sharing a Car Loan
The real question we’re asking when we query, “Can two people put money down on a car?” is, can two people buy a car together? The simple answer is, of course, and it’s called joint-borrowing or co-signing when you’re financing the vehicle. However, nothing is ever simple when it comes to money, contracts, and ultimate responsibility.
How or where a borrower comes up with the cash for an auto loan down payment is irrelevant to the transaction. You can borrow money for a down payment from a family member or anyone else, for that matter. Although lenders frown on a person using cash from a personal loan as a down payment, it’s not illegal. However, the deeper question we pose (and will answer) here is: Can two people share a car loan? That is to say, can two people take out a car loan together?
There are two paths by which two people can appear in car loan paperwork and, in essence, share the loan. The first is co-signing, and the second is joint borrowing. We’ll look at both, discuss the pros and cons of each, and, of course, tell you what we would do if faced with either.
What Is Co-signing a Car Loan?
Co-signing is a tactic for borrowers with weak or no credit. In simple terms, co-signing is when someone with strong credit contractually agrees to make the payments if the borrower can’t. The borrower must still meet the income requirements for the loan. However, a strong co-signer allows the lender to take a chance on borrowers with a low credit score or dings to their credit history. Sometimes, a co-signer with an excellent credit score can even lower the loan’s interest rate.
When Do You Need a Co-signer?
Securing a car loan involves the borrower providing personal information like income, housing (rent or own), outstanding debt, and so on. As the potential lender checks out the provided information, it will also obtain the borrower’s credit score and credit history. The lower a borrower’s credit score, the more information the lender will require.
The process ends when the lender either approves or denies the application. When a lender rejects a borrower’s application, the borrower must determine the lender’s reasons for denying the loan. Maybe there is a relatively easy fix or solution. On the other hand, some issues go much deeper, and applying with another lender might not have a better outcome.
Tip: We encourage you to apply to more than one lender before considering a co-signer.
Your options are limited if your credit score is below 500 and your credit history has negative marks for maxed-out credit cards or accounts in collection. Situations like that may limit you to shopping at a buy-here-pay-here dealership or finding a co-signer.
How Does a Co-signer Car Loan Work?
Working with a co-signer isn’t really any more complicated than securing a loan on your own.
Steps to a Co-signed Loan
- Finding a co-signer – Anyone you pick to co-sign a loan must be on solid financial footing. This person needs a healthy credit score of 650 and above (the higher, the better) with a good credit history and sufficient income to cover the payments if necessary.
- Locating a lender – Finding lenders willing to accept a co-signer for a car loan isn’t difficult. Many lenders do. We suggest beginning with the bank or credit union where you have an account. They will be more inclined to work with you. From there, reach out to other banks and credit unions. If you are still hitting a wall, move on to finance companies because their core business is making loans.
- Applying for the loan – The difference in the application process with a co-signer is that both you and the co-signer must apply. In other words, each of you will have to fill out applications, providing personal financial information, work history, income, and so forth. The paperwork must convince the lender that your co-signer can make the payments if you can’t.
- Making payments – As long as the borrower makes the monthly payments on time, a co-signed loan works just like any other car loan. However, if the borrower misses a payment, the lender will look to the co-signer to make it good. If the borrower stops making payments, the co-signer could be responsible for paying off the loan.
- Fulfilling the loan term – Once the loan term ends and the loan balance is zero, the co-signer’s obligation is complete, and the car belongs to the borrower.
Pros and Cons of a Co-signer Car Loan
Let’s look at what is good and not so good about having a co-signed car loan.
Spoiler alert: There is much more upside for the borrower than the co-signer in a co-signed car loan.
Pros
- Better odds of approval.
- A strong co-signer may qualify you for a lower interest rate.
- Successfully paying off the loan will help strengthen your credit and credit score.
Cons
- The loan will appear on the co-signer’s credit report, possibly lowering their credit score.
- Any missed payments become the co-signer’s responsibility.
- The co-signer is potentially open to any legal costs, collection fees, late payment fees, or other penalties resulting from the borrower’s nonpayment.
- Yours wouldn’t be the first friendship or family relationship destroyed by a co-signed loan gone bad.
Should You Co-sign Car Loan?
In a word, no. Sure, there are a few exceptions for co-signing a car loan. For example, you might want to help an adult child trying to establish credit or another close family member having a rough patch. Or perhaps it’s to return a favor to someone who pushed you out of the way of a runaway bus and saved your life. The risks are many if you co-sign on a car loan.
Here are a few reasons not to co-sign:
- Other than being kind, there is no upside for you.
- It will show as a loan on your credit report and probably lower your credit score.
- Every late and missed payment by the borrower will affect your credit.
- If the car is repossessed or the lender takes other legal action, it will wind up on your credit report.
- Any fees, penalties, and charges generated by the lender taking collection action will be yours.
- The car won’t be yours even if you end up paying off the loan.
Is a Co-signed Car Loan a Good Idea?
When it comes to securing financing for a car loan, a co-signer may be an acceptable bad idea. We strongly recommend against it. However, sometimes you may have no other option. Honestly, for the borrower, there isn’t much downside. Well, other than the possibility of making an enemy of the co-signer if things go wrong. The bottom line: It should be the last resort.
What Is Joint Borrowing on a Car Loan?
Also known as a “joint car loan,” joint borrowing on a car loan is a much different animal than co-signing. Often but not always, a joint auto loan will occur with a husband and wife or others in a cohabitation situation who will share a vehicle. Joint borrowing allows them to pool their income to qualify for the loan. Although it can be a tool to help a borrower with weak credit secure a loan, a lender often bases a joint auto loan’s interest rate on the lower credit score of the two borrowers.
How Do Co-signed and Joint Car Loans Differ?
The primary difference is that joint borrowers are 50-50 partners in the car, the loan, and all the responsibilities car ownership entails. A co-signer has no legal rights where the vehicle is concerned. If the borrower fails to make payments, the co-signer must pick up the slack but has no rights to the car. The borrower retains ownership even if the co-signer eventually pays off the loan. Moreover, the co-signer bears no responsibility for insuring the car or any legalities resulting from an accident.
No matter what private arrangements joint borrowers agree to, legally, both are responsible for the payments. The loan will appear on both credit reports, and once the loan is satisfied, both names will appear on the car’s title. Both are also responsible for insuring the car and will share any legal repercussions should the car be involved in an accident.
Pros and Cons of a Joint Car Loan
There isn’t much daylight between the pros and cons of co-signing and those of joint borrowing; however, joint borrowers share all the rights of ownership, which a co-signer doesn’t.
Pros
- Better odds of approval.
- Two incomes allow for buying a more expensive car.
- Shared expenses like insurance, maintenance, and fuel.
Cons
- Disposing of the car requires the agreement and signatures of both borrowers.
- Falling behind on loan payments will damage both borrowers’ credit standing.
Is a Joint Car Loan a Good Idea?
A joint car loan is best reserved for cohabitating couples – even better if the couple is married. The odds of securing a loan under such conditions are better than going it alone. Both parties have skin in the game and their names on the loan and title. Both parties’ credit scores will reflect the loan for good and bad. When the time comes to sell or trade in the car, both borrowers must agree and sign off on the disposition. It’s a partnership; like all partnerships, it can succeed or fail.
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