BMW FS: Loan at 7.89% vs Loan with a cosigner at 2.98% for a new BMW

[Anonymous]

So the BMW FS finally approved my credit application after denying it last week. They approved with 7.98% APR. while waiting for their approval, I got a plan B to use a cosigner (my cousin) who has stellar credit score and would give me 2.98% APR.

My Fico Auto Score 8 is 681 and overall Fico is 640. I am an immigrant doctor with a thin file and working on building a credit. Does having a cosigner reduce my chances of building a credit? If not, then it seems like a better deal with much lower APR? I would like to hear thoughts from experts on this forum. thank you in advance.

[iv]

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@Anonymous wrote:

Does having a cosigner reduce my chances of building a credit?

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Nope. It counts in exactly the same way on your reports and scores as a solo loan would, and this is a fairly common way to help out a family member who is new to US credit. It's your cousin who needs to think carefully about making you the offer, though.

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@Anonymous wrote:

If not, then it seems like a better deal with much lower APR? I would like to hear thoughts from experts on this forum. thank you in advance.

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It is a much better deal... because your cousin's credit is then also on the line...

If you default, or even just make a single late payment, their credit will be impacted just as much as yours.

If you go down the cosigning route, just make very, very sure that you don't mess up the payments, ever.

[Anonymous]

Thank you for the reply. I will be doing automatic payments each months to avoid any chance of missing. Also, plan is to refinance after 6 months without cosigner, hopefully my credit has improved. I just needed to know if cosigner path is as good for building credit. Does it have to do anything with primary borrower?

[iv]

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@Anonymous wrote:
I just needed to know if cosigner path is as good for building credit.

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Yes, it is.

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@Anonymous wrote:
Does it have to do anything with primary borrower?

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Nope. The loan will appear on both your reports as "Joint", with no indication of who was listed as the primary on the paperwork.

For all automated reporting/scoring purposes, this is identical to a solo loan.  Looking manually at a report, the "Joint" status is visible, but that doesn't matter, as joint loans are very common even outside of credit-building scenarios, for spouses, etc...

[Anonymous]

thank you so much. does the amount of loan matter when it comes to building credit? I was using the score simulator of Chase. I found that a 50K loan would raise score higher than a 20K loan. but again that is a simulator 

[iv]

Don't bother with the simulators, most aren't even using real FICO scores, and the ones that do are still wildly inaccurate.

Scoring is not directly affected by the amount of the loan - the two largest loan-related impacts are adding your first installment loan at all (a purely positive effect), and the percentage of the loan that has been paid down (the more of the loan is paid down, while the loan is still open, the better).

If, for instance, you could afford the same car with either the 50k or 20k loan, it would be better for scoring to open the 50k loan and immediately pay it down to 20k (and the maximum effect would be at under $4,495).  That "extra bonus" effect from having a close-to-paid-off, but still open loan does disappear once the loan is fully paid off, though.

[Anonymous]

so you are saying, take 50K loan and paying it off faster (say within 12 months) will have better effect on score than paying it off over say 36 months.

[iv]

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@Anonymous wrote:

so you are saying, take 50K loan and paying it off faster (say within 12 months) will have better effect on score than paying it off over say 36 months.

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Yes and no.  While the loan is still open, it being paid down by a large amount helps... but that effect disappears as soon as the loan is closed.

So paying it down quicker does help your score quicker, yes. But some of the positive effect disappears once it's paid off. (Having a closed installment loan on your reports is still a good thing by itself, but an open almost-paid-off installment is much better.)

If you plan to refi into a loan of your own (or just open a new account/loan), the optimal time to do that (from a scoring perspective) would be when the loan was at least 12 months old, and paid down to under 9% of the original amount.  Remember that this isn't necessarily the optimal financial thing to do, but if you have the cash, and are mostly concerned about building your credit...

[Anonymous]

Thank you for your explanation. That makes sense now that I am learning about DTI and Credit Utilization terms. Does it matter if the monthly installments are made by credit card or direct bank withdrawals?

[iv]

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@Anonymous wrote:

Does it matter if the monthly installments are made by credit card or direct bank withdrawals?

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Normally, payments to an auto loan would not be made via credit card.  Generally speaking, auto lenders will not accept payments via card directly (they don't want to pay the transaction fees), and other methods for paying (card access checks, or third-party processors like Plastiq) will charge YOU the transaction fees.

(The costs for processing a payment via credit card usually run between 1%-3% of the total charge, while processing a payment via ACH or similiar direct withdrawal is usually a flat rate of $1 or less per transaction.)