How to Co-sign a Car Loan in Canada
Written by DriveAxis.ca October 12, 2022
There are times when a co-signer can really help out, especially if you’re planning to make a large purchase, such as a new car. However, there are things to keep in mind when asking someone to co-sign on your behalf. In Canada, it’s relatively easy to co-sign for a new car, but don’t proceed until you understand all the criteria.
The biggest risks of co-signing for a new car tend to revolve around the relationship between the two parties. If something goes wrong, it could sour the friendship or bond quite negatively. However, if both parties are responsible, there are several major advantages to getting a co-signer to help you buy your next car.
A co-signer is someone typically with good credit who will co-sign a loan on your behalf. This tends to occur if your credit rating does not meet the minimum required criteria for a loan. In some ways, it’s a vote of confidence on the part of the co-signer, who is willing to put his or her name in writing to vouch for you as a loan applicant.
There’s no real stipulation when it comes to who can co-sign for you, provided they have strong credit and/or a financial situation that will act as a safety net if you aren’t able to pay your loan. For that reason, spouses and family members tend to be the most common co-signers.
THE REASON FOR A CO-SIGNER
As mentioned before, co-signers jump into help when someone is not able to secure a loan by themselves. Poor credit is usually the reason, but lack of credit altogether is another. For instance, a father may choose to co-sign on behalf of his young son who has not yet had the opportunity to establish his own good credit score.
Similarly, a person may be able to secure a loan on their own, but with a much higher interest rate than expected. In the long run, this can prove financially burdensome, which is where a co-signer comes in. And of course, some lenders may require a downpayment, especially if a car is being financed. If the buyer does not have enough cash to fulfill that downpayment, a co-signer can step in to secure a different kind of deal.
UNDERSTANDING CO-SIGNERS VS. CO-BUYERS
The uninitiated may think that co-signers and co-buyers are the same thing, but they are not. Many loan applications offer fields for both, but the differences lie mostly in financial responsibility. Typically, co-signers are there to provide a guarantee that the loan will be paid, by one party or another (even though both are technically responsible). The co-signer does not, however, have ownership rights to the car in question, nor can they be listed on the registration, title or ownership.
Conversely, a co-buyer has equal stake in the purchase, and it is generally accepted that both will “share” the car equally. This is typically taken advantage of by married couples where one spouse has lesser-quality credit than the other, since both will own, and probably drive the car. Keep in mind that despite co-buyership of the vehicle, only one individual may be listed as the primary driver when it comes to insurance.
THE BENEFITS OF A CO-SIGNER
If the intended buyer has the right frame of mind, and is responsible by nature, it can be beneficial for them to get a co-signer. This can help them establish credit they would not normally possess on their own, or it may help them repair bad credit wrought by previous financial mistakes in earlier years. If the buyer makes their car payments on time, consistently, they can not only pay off their vehicle, but receive an exponential boost in their own credit rating.
THE DRAWBACKS OF A CO-SIGNER
As expected, there are drawbacks to having a co-signer. First, any problems with the loan later on down the road can significantly threaten the relationship, especially if family members are involved. Transparency is key here, and the co-signer should know what they’re getting into. Similarly, you as the primary buyer should always respect the fact that your co-signer is going out on a limb for your sake.
From a co-signer’s perspective, there are credit-related issues to consider. First, any amount you’re co-signing for will show up on a credit report, including the amount owed on the car, and the time left to pay it off. This can have a slight-to-medium negative impact on the average age of the debts on your report, as well as your new credit variable, shown on your FICO score.
Similarly, if you intend to make a major purchase for yourself or your family, you need to take the existing co-signed debt into account. Depending on your credit history, debt-to-income ratio, etc., you may or may not qualify for the loan you seek. This may not be an issue for smaller purchases, but larger investments such as complex home renovations, college or university tuition fees, a new credit card or line of credit, and even a car loan for yourself could be affected.
And finally, if the buyer begins missing payments, that will show up on the credit statements of both parties, not just one. By going to bat for your friend or family member, you are putting yourself directly in the path of any credit hits that may arise in the future. In the worst-case scenario, the co-signer could also be sued by the lender if the buyer defaults on their loan, though this is considered an extreme case.
Co-signing for a car loan in Canada is very easy, but many fail to factor in future variables. Besides the money lost, there’s something even more important at stake - your friendship. Both buyer and co-signer should be aware of what they’re getting into before taking the next step. If both are responsible and capable, there should be no issues.
DriveAxis.ca understands how easy it is to secure a car loan, which is why so many people get a co-signer these days. Instead, we help people with bad or nonexistent credit get approved instantly, so they can get the car they want most, while repairing their credit score at the same time. Contact us today before you decide to opt for a co-signer. It’s better for you, and better for them.