What is a Cosigner?
A cosigner is a person who officially shares the responsibility of paying a debt with a borrower.
A cosigner signs together with the borrower to help them get better terms or to help them get approved for a loan. A cosigner may also help the borrower qualify for a higher amount of capital.
Generally, a cosigner is someone who has a good credit score and can significantly improve the borrower’s chances of the lender approving him or her.
People who don’t have a lengthy credit history, like students or recent high school graduates, may have difficulty getting credit for the first time.
These borrowers can benefit from a cosigner.
How Cosigning Works
One of the most common examples of cosigning is when a parent signs a rental agreement for their child.
While this doesn’t involve any borrowing, many first-time tenants find it difficult to get a lease because they don’t have enough credit history or earn enough income to qualify on their own.
Note: In the example above, it is assumed the parent won’t pay the monthly rental charges. However, if the child is unable to pay, the parent is responsible for the payments. If the parent fails to pay, it could negatively affect their credit history.
Applying with a Cosigner
In a loan application with a cosigner, the lender will require information about both the cosigner and the principal borrower.
Both individuals will need to provide personal information that will allow the lender to check their creditworthiness.
The insurance decision and terms for the cosigned loan will be based on the profiles of both the cosigner and the borrower.
If the loan is approved by the lender, standard procedures will apply. The lender will prepare a loan agreement that will detail the terms of the loan, including the interest rate and monthly repayment schedule.
Both the cosigner and the principal borrower must sign the agreement for the funds to be disbursed. After signing the loan agreement, the main borrower receives capital in a lump sum.
The primary borrower is responsible for making the monthly loan payments. If the borrower is unable to pay, the cosigner’s obligation shall take effect.
Depending on the terms of the loan, the lender may immediately start reporting arrears for both the borrower and the cosigner to the credit bureaus.
Reasons to Cosign for a Loan
- It helps an applicant obtain financing.
- It helps an applicant build credit.
People trying to apply for a loan with poor or limited credit history often face the grim reality of numerous loan rejections.
However, lenders will often reconsider a loan application if there is a reliable cosigner on the application.
This can make important life steps like purchasing a new vehicle or attending college possible.
When you cosign a loan, you have an active hand in helping a person build a better credit score, thus opening doors for future lending options.
Cosigner vs. Co-Borrower
A cosigner differs from a co-borrower in that the cosigner does not receive the principal of the loan, nor does the cosigner initially have to make regular monthly payments.
Many lenders offer cosigning as an option for a variety of loan products including personal loans, car loans, student loans, mortgage loans, and more.
It is important to note that not all lenders allow cosigners. If you know you will need a cosigner, it’s important to do your research before choosing a personal loan provider.
Some credit cards may also offer borrowers the option to include a cosigner.
Risks Associated with Cosigning a Loan
The first risk is that it increases your debt-to-income ratio, which is the percentage of your income that goes toward paying debts.
Secondly, as a cosigner, you can be held financially responsible for the debt after you sign the documents.
Another risk is that you can’t remove yourself as the cosigner without the lender’s permission or through the borrower refinancing the loan into his or her own name.
And likely the biggest risk of being a cosigner is your credit score.
If the borrower defaults on the debt, your credit will receive the same negative marks as the borrowers.
What credit score is needed to buy a car without a cosigner?
You can get a car loan with no cosigner, although first-time borrowers or people with bad credit can benefit from a cosigner on their car loan. Typically, applicants need a credit score of at least 660 to qualify for decent interest rates without the need for help cosigning a car loan.
Sources
- Consumer Financial Protection Bureauaccessed on July 13, 2022
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