Does a Co-Signer Help Lower Interest Rates on Cars?

Getting a co-signer on an auto loan might help you get a lower interest rate if you've had past credit problems or have a short credit history. However, it may be tough to find someone who's willing to co-sign an auto loan because people put their finances at risk by co-signing loans.

Lenders

Lenders base loan interest rates on the risk they perceive a borrower poses. People who have low credit scores usually pay high interest rates because lenders classify them as high-risk borrowers. A co-signer can help a high-risk borrower get a lower interest rate on a car loan because a lender uses the co-signer's credit rating and income to guarantee repayment of the loan. You would need to know whether a potential co-signer has a better credit rating than yours to determine whether you could get a lower interest rate with a co-signed auto loan.

Credit Scores

An auto lender will likely require a co-signer to have an excellent credit score to get an interest rate that's significantly lower than a borrower with credit problems could get on his own. Co-signers generally should have scores of 700 or higher to get some of the best rates on auto loans, according to Cars Direct. People who have scores that high have a history of paying their bills on time, which appeals to the lender.

Loan Payments

Co-signed auto loans also get lower interest rates because the co-signer and the borrower are equally responsible for repaying the loan. Most states even allow lenders to collect payments on delinquent loans from co-signers without first pursuing borrowers for payment, according to the U.S. Federal Trade Commission. Some lenders seek repayment from co-signers first because they have better repayment histories than the primary borrowers. A co-signer also may have a higher income, which increases a lender's chances of recouping delinquent loan payments.

Considerations

Borrowers who have co-signed auto loans can improve their credit scores by making their loan payments on time. Payment history alone affects 35 percent of consumers' Fair Isaac Co., also known as FICO, credit score. Borrowers who consistently make on-time payments may eventually be able to refinance their auto loans to remove their co-signers from their contracts. You should first find out if the interest rate on a refinanced loan would be higher than the rate on the co-signed loan. A higher interest rate could make the loan unaffordable.