Does It Affect a Car Loan If the Co-Applicant Has Bad Credit?

When you apply for a car loan with a co-applicant, the lender checks both your credit score and the credit score of the applicant. A co-applicant with a high credit score strengthens the application and usually means you pay a lower rate. If your co-applicant has a poor credit score, it weakens your application and means you pay a higher interest rate.

Character

Lenders use credit scores as a way to gauge your character before you take out a loan. If your credit score shows that you have failed to pay off previous loans or that you make infrequent loan payments, the lender assumes that those bad credit management habits are likely to continue. Lenders are not obliged to lend you money so if you or the co-applicant have a poor credit score, the lender may decline the loan application.

No Credit

You may have a low credit score because you make frequent late payments, but you or your co-applicant may also have a low score because you have very little credit history. When you have no credit history, lenders are wary to lend you money to buy a car because the lender has no way of knowing if you are the kind of person who makes every effort to pay your bills on time. However, if you add a co-signer to your application and that person has good credit, you can usually qualify for the loan. In the absence of much credit data relating to you, the lender relies heavily on data related to the co-signer---therefore a co-signer with good credit helps you obtain a loan.

Rates

Lenders generate profits from charging interest on car loans. Lenders charge the lowest rates to people who seem unlikely to default on loans. If you or the co-applicant have a poor credit score, the lender may still approve your application but only if you agree to pay an above-average interest rate. If you pay more interest than other borrowers, then it means the lender loses less if you eventually default on the loan than the lender would lose if you paid the same interest rate as more creditworthy borrowers.

Income

Aside from your credit score, the lender also has to ensure that you have enough income to make the loan payments. If you have good credit and sufficient income to finance a car without a co-signer, then you can only harm your application if you add a co-signer with a credit score lower than your own.