Do I Need a Cosigner to Refinance My Car? Learn How Someone with Established Credit Can Help

Applying for a car loan or refinancing is a major step for many adults and may be one of the largest monthly payments that you have in your budget. As in any situation when you apply for credit, having a higher credit score will qualify you for better terms on your refinanced car loan.

If you don't have a strong credit history — or any credit at all — a cosigner may be able to join your loan application and use their stronger credit history to make the loan's payments more affordable.

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While you can use a cosigner for an initial credit application or for a refinance, it is not a requirement.

In some cases, a lender will not approve a loan for someone with a low credit score, which would make a cosigner necessary, but loans usually do not require a cosigner in other situations, especially when the applicant can show proof of monthly income and has a credit history.

What Is a Car Loan?

A car loan is an amount of money you can borrow from a financial institution to cover the cost of buying a new or used vehicle. The loan will have a contract with set terms that you and the lender agree upon, such as the loan amount, the number of months it will take to repay the loan, and the interest rate.

The lender will offer terms after reviewing your credit application, which you can complete in advance or at the dealership at the time of purchase. Either way, the lender will decide to offer a car loan based on your creditworthiness.

Once you sign the contract, you will begin the repayment process. Generally, the lender will give you a consistent payment amount for the life of the loan, which combines principal and interest to make up a monthly payment.

If you have a strong credit history and a high credit score, the interest rate of the loan may be lower, leading to smaller payments than those for a borrower with a lower credit score or poor credit history.

What Does It Mean to Refinance a Car Loan?

Refinancing a car loan means you are replacing your original loan with a new one to pay it off. You then start making monthly payments toward the refinanced loan. You might decide to refinance in order to lower your monthly payments, reduce interest rates, or pay off your debt more quickly.

For instance, if interests rates for loans have improved since you got your first car loan, you may want to refinance to take advantage of the better rates. Additionally, if you had bad credit when you first took out your loan, you may refinance your auto loan with a cosigner to try to get a better deal.

Who Should My Cosigner Be?

Your cosigner should be a trusted individual (with better credit than yours) who agrees to share the responsibility for the loan. A cosigner will have their credit checked for the loan application and will have the debt of the auto loan added to their credit report.

In many cases, a cosigner could be a family member, such as a parent or grandparent, or a trusted friend with a strong credit history. The cosigner should have the ability to get a favorable interest rate on the auto loan and, if you make the payments on time, will build even better credit as the loan is paid back.

While the cosigner should feel comfortable making the loan payments if you can't, you should still feel certain that you can hold up your end of the deal.

What If I Have Bad Credit and No One Who Can Cosign with Me?

In most cases, having bad credit and no cosigner won't deliver a good result when it comes to getting a car loan or refinancing. In order to qualify for a loan, you may have to make a large down payment or work with a subprime lender who can (and most likely will) give you a massive interest rate on the loan. This may be fine if you're looking to build credit and have plenty of money coming in each month to cover the inflated payments.

Another option is a Buy Here Pay Here program, which typically does not require any credit history. These programs have some requirements for borrowers, typically proof of income at a certain level, but can help to build credit as long as the dealer reports payment activity to the credit bureaus. Most often, these programs are looking for individuals who are employed and need to build credit.

If you are unemployed, you will have to show proof of income to qualify for a loan, and a larger down payment may also be part of the process. As with subprime loans, these programs usually involve high interest rates.

What Is the Refinancing Process for an Auto Loan?