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Nobody disputes that spouses should make major financial decisions — such as purchasing a car or refinancing an auto loan — together. A more complicated question is whether spouses should be on a car loan as cosigners. Although having a spouse cosign on your car loan might make sense in some instances, it can be a risky personal and financial move in others.

What Is a Cosigner?

A cosigner agrees to pay a loan if the primary borrower defaults. When someone cosigns a loan, they assume responsibility for making loan payments if the original borrower falls behind on repaying the debt. Once the primary borrower defaults on payments, the cosigner is responsible for paying the balance of the loan, along with any fees related to the late payments. Also, the lender now treats the cosigner as the debtor.

Cosigner vs. Co-Borrower

Cosigners are not quite the same as co-borrowers. Co-borrowers apply for a loan together so that they can purchase (or refinance) an asset that they both own and use. When a married couple takes out a mortgage on a home that they both live in and own, they are co-borrowers.

A cosigner, on the other hand, assumes responsibility for paying someone else’s loan. The cosigner does not co-own the asset that the loan was used to purchase.

Why Do People Need Cosigners for Loans?

Lenders evaluate loan applications using multiple criteria, including income, credit history and current debt. If a loan applicant has poor credit, no credit, doesn’t earn very much or is struggling under a lot of debt, the lender might reject the application outright, offer a smaller loan or a loan at a higher interest rate. Sometimes a lender might ask that the borrower reduce the lender’s risk by finding a cosigner.

The Risks of Being a Cosigner

The risks of being a cosigner are significant. If you cosign a debt, and the original borrower doesn’t make payments on time, here’s what can happen:

The lender can require you to start making payments on the debt.
The lender can initiate collection proceedings against you, including a lawsuit.
Your credit score can be damaged.

In addition, cosigning a loan increases your debt load, impacting your credit score. This affects your ability to obtain a credit card, take out a loan for your own needs or qualify for good interest rates on goods and services. Because of these risks, you might want to check out other alternatives that can help you buy a car or refinance a car loan.

Spouses as Cosigners: What You Need to Know

Having your spouse as a cosigner might seem counterintuitive: You share finances and will both benefit from an automobile purchase or refinancing. Co-borrowing might make more sense, as would having the spouse with the best credit apply for the loan.

In some households, however, only one spouse drives and will have ownership of the car. Many people owned a car before getting married and could want to refinance that vehicle without putting their spouse on the title. In these cases, cosigning might make some sense.

As you make your decision, be aware that some lenders might tell you that your spouse is required to cosign a loan that you take out for your own vehicle. The federal Consumer Financial Protection Bureau makes it clear, however, that although a lender can require you to have a cosigner, it cannot require that person to be your spouse.

The Risks of Cosigning for a Spouse

There are significant risks to being a cosigner of a loan. These risks increase when a spouse acts as a cosigner. Cosigning impacts a spouse’s credit and finances, so your household might not have at least one spouse with pristine credit and financial stability. Should you face unexpected financial difficulties, your household will have to manage the debt that your spouse is obligated to pay.

Cosigning can also negatively impact your relationship with your spouse. Defaulting on your car loan or refinancing could leave your spouse feeling betrayed.

Alternatives to Cosigners

An alternative to getting a cosigner is to try to improve your credit score. And if your household has more than one automobile, or your current car is still drivable, you could use a refinance car loan calculator to determine whether refinancing could free up some cash that could be used to pay down debt or increase savings. A GAP waiver can also minimize liability for the difference between your car’s value and your current debt obligation.

Whatever you choose, it is worth it to explore all of your options, which could include delaying a purchase or refinance, improving your credit or working with specialists, who will work to help you get good terms on a loan that you can afford.

Chances are, if you’re a licensed driver, you probably have a car loan. Around 85% of all new car purchases and 53% of all used car purchases are financed in the U.S., according to a report by Experian. The average American household also has more vehicles than drivers, and many of those additional vehicles are financed too.

While you can have multiple car loans at the same time, lenders will want to know if you’ll be able to make payments on all of your financed vehicles. Qualifying for an auto loan may be a little harder this time around. Here’s why.

Yes, You Can Have More Than One Car Loan

The simple answer to this question is yes. If you have good credit and can afford another monthly payment, you should be able to finance another car.

Ultimately, a bank, credit union, or another financial institution is likely to provide auto loan financing to any individual they deem credit worthy, regardless of the types of loans they have on their credit history. In order to secure a second car loan and get the most competitive rates, you need to show the banks that you can afford the additional debt and will pay it back.

Lenders will look at the following factors when evaluating your car financing application:

Down payment: Do you have enough cash?
Credit score: Is it over or below 600?
Payment history: Have you been making all of your other payments on time?
Debt-to-income ratio: Is your DTI less than 50%?

If you have a relatively high monthly income, enough cash for a down payment, a good credit score, and a solid debt-to-income ratio, a lender may be more willing to give you an additional loan, and with a really great interest rate too.

If you have bad credit, it’s still possible to qualify for another car loan. There are many lenders who work specifically with borrowers with subprime, or poor, credit. Your interest rate may not be as competitive as someone with a higher credit score, but after a few months of on-time payments on your credit report, you may start to see your credit score go up.

A common strategy for borrowers with bad credit is to buy and finance the car, then wait a few months for the on-time payments to make a positive impact on their credit. Once their credit score goes up, they apply for auto loan refinancing to get a lower, more competitive interest rate.

Should You Take Out Another Car Loan?

There are many reasons why you might opt to use your credit to finance an additional vehicle, but you want to be sure you weigh all the pros and cons before taking advantage of all your financing options.

Perhaps you need another car for a spouse or child. Perhaps you currently drive a sedan and believe you could benefit from adding a truck or SUV to your fleet. All of these are totally valid reasons why you might seek an additional vehicle loan.

Pros of taking out another car loan:

Taking out an additional loan can help you achieve your goal without saving up a ton of money or waiting until your current loan term is up. But there are some downsides to consider as well.

Cons of taking out another car loan:

Having two or more loan payments can take a significant toll on your monthly budget, which may cause you to default on payments. What’s more, loan applications leave a hard inquiry on your credit report, which could cause your score to drop.

Do Multiple Hard Inquiries Ding Your Credit?

Depending on the circumstance, multiple hard inquiries may or may not hurt your credit.

Remember that each time you attempt to get approved for a new loan, you add a hard inquiry to your credit score. Hard inquiries can bring down your score five to 10 points, and too many can signal to a lender that you’re a high risk or irresponsible with credit.

However, multiple inquiries for the same type of loan during the rate shopping period will only count as one.

Consider Refinancing Your Loan(s)

If you have a high interest rate on your current auto loan, you may want to consider auto loan refinance. If approved, refinancing will help you get your annual percentage rate (APR) down, which will ultimately lower your monthly payment and free up cash for other monthly expenses, such as a second car loan.

Use our refinance car loan calculator to see how much refinancing could save you during the repayment process. If you have multiple car loans already, you may want to apply for refinancing to get lower auto loan rates and save money over the life of your vehicles.

Weigh Your Options

In theory, you can have as many car loans as a vehicle financing company will grant you, but you will need excellent credit and a high income to qualify for a second loan. There are no laws preventing an individual from taking out more than one car loan, so if it makes sense for your financial situation, it may be a smart option.

Weighing your options and evaluating your own unique financial situation is critical when deciding whether or not to take out an additional loan.

Category: Credit

Should Both Spouses Be on a Car Loan? Things to Consider Before Cosigning with a Spouse