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Starting off in life isn’t always easy. This is particularly true for establishing financial independence. We occasionally need loved ones to be our safety net when we’re taking our first steps toward life on our own — or even when we need to pick ourselves up after a setback.

There are several ways parents, partners or loved ones can help someone trying to establish or reestablish good credit. One of these is being a co-applicant on a car loan. In many states, cars are requisite to personal independence and self-reliance, so if a parent helps their child buy that first car, the support becomes twofold. They’re helping them build both financial and personal independence at the same time.

Moreover, a car is a major purchase, so responsible repayment of the loan can go a long way toward building a solid credit history.

What are the ways a co-applicant or cosigner can help someone purchase a car? First, let’s examine the differences. A “co-applicant” is often synonymous with “co-borrower,” or someone who is an equal partner in the purchase. This is most common for married couples. A co-signer is more of a “backup” plan. This person agrees to assume financial responsibility in the case of a default. Both can offer key benefits and protections for you and the lender. It’s up to the party providing the assistance to decide on the preferred level of involvement.

Here are four reasons you might consider being a co-applicant or co-signer on a car loan:

1. To help a child build credit

Establishing credit is often a catch-22. You can’t get credit until you’ve had credit — and you can’t build credit without a history. This is why parents co-buying or cosigning a car with their young adult is so common. When parents co-borrow or cosign, the child can get reliable transportation and establish credit. If, after a time, the child has proven themselves to be responsible with the payment, the car can be refinanced to have the parents taken off the loan. However, the interest rate is likely to increase; so, think carefully before making the decision.

2. Qualify for a better interest rate and higher loan amount

Two incomes on an application can help buyers qualify for the best possible rate and a higher loan amount. This situation is most advantageous when the co-applicants have comparable credit scores, since a low score may drag down the benefits of an added income. This could work well for married couples that want to get the best deal possible with their combined incomes.

3. Helping a friend or loved one repair their bad credit

An incident as commonplace as a health problem or job layoff can cause a devastating financial setback. Even if the problem is temporary, the scars on credit can take years to overcome. Reestablishing credit with a major purchase can help rehabiliatate that score faster, but a co-applicant or cosigner may be required. An advantage to this is that a co-applicant can help secure better terms, so the buyer’s recovery won’t be impeded by high interest and high monthly payments.

4. Assist an aging parent

Those at the twilight end of their financial life cycle might also need some help. If you have a parent on a fixed income, being a co-applicant can help them get a safe, high-quality car at the best-possible rate. A low interest rate can drop the monthly payment by a significant amount. This is money that can go toward other living expenses and not further burden a limited income.

When co-applying for a car loan, both parties must be aware of the responsibilities and liabilities they’re agreeing to, but if these are handled conscientiously, there are many circumstances where the arrangement can be beneficial for all involved.


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