Do I Need a Co-Signer?
In certain credit situations, you may need a co-signer to get a car lease or loan
People who have had credit problems in the past, or who have no credit history at all, may find it difficult or impossible to lease a new car or to get a car loan. Getting a co-signer might be the answer.
Finance companies and large banks, such as those who provide loan and lease services for car dealers, want to make sure that borrowers will fulfill their obligation. They want to make sure they only lend money to "credit worthy" customers who will pay on time and complete all payments.
Before we proceed, let's be clear about the difference between a car loan and a car lease. Actually, the two are more alike than different. Both are financial obligations for a specific vehicle, for a specific, monthly payment, for a specified length of time. Contrary to what some believe, car leasing is not car renting. Therefore, it is just as important, if not more important, to have a good credit history when leasing as with applying for a car loan.
About your credit history
Everyone who has ever had a credit card, department store account, car loan, home mortgage, or personal bank loan has a credit history or credit file. In that file will be details about the accounts, the amounts still owed, credit limits, late payments, defaults, repossessions, and bankruptcies. Negative data can stay in the report for up to 10 years.
Where problems often arise is when a person has had no loans or credit accounts in the recent past, either because they are too young or simply didn't want/need them, but now want to get a car loan or lease. Or maybe the person has a short credit history — only a couple of relatively recent accounts — not enough data for a clear "picture" of the person's credit performance. This situation is called "insufficient credit." Unfortunately, having little or no credit history has the same effect as having a poor credit history.
Car dealers, banks, and finance companies rarely look at someone's entire detailed credit history report. Instead, they look at the person's credit score, which is a single number that summarizes everything in the history report. It's all condensed down to one number that instantly tells a bank or finance company about a person's credit worthiness. For example, a score of 550 is very negative while a score of 750 is very positive.
Anyone planning to get a car loan or lease should know their credit score before they ever visit a dealer. It's easy enough to get it online from a service such as FreeCreditScore.comwho will show show you your latest credit score after a simple sign up. They tell you exactly how your score rates and how lenders will interpret it.
How does a co-signer help?
For someone with no credit or poor credit, a co-signer can be the answer to getting a car lease or loan.
A co-signer is simply someone with good credit who is willing to make your loan or lease payments if you cannot. Both your name and the co-signer's name go on the loan or lease contract, although the co-signer is not a co-owner.
Lenders look at the credit score of the co-signer as "primary." Approval of a car lease or loan is based primarily on the co-signer's qualifications, which allows someone with no credit or poor credit to get the car they need.
A co-signer can be family or good friend who believes in your ability and commitment to make your payments on time and complete your obligation.
The co-signer should be aware that the new loan or lease will also appear in his/her credit history report. If the loan or lease is completed as promised, both reports receive a positive score.
Getting a co-signer is a great way for someone with no credit to begin building a good credit history — and for someone with bad credit to begin recovering. In some cases, it may be the only way.
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