Co-signer rights: What you need to know
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For individuals with a poor credit history or no credit history at all, finding a lender who will grant them a loan can be tricky. Getting a friend or a family member with a better credit history to cosign a loan can make lenders more likely to grant these individuals a loan.
Becoming a co-signer should not be taken lightly. A co-signer takes on all the rights and responsibilities of a loan along with the borrower. This means that if the borrower can’t make a payment on the loan, the co-signer is responsible. Cosigning a loan can also affect the credit score of the co-signer for better or for worse.
If you are considering becoming a co-signer for a friend or a family member, consider the impact it may have on you and your financial history before agreeing to sign on to the loan. It is also important to make sure you know the interest rate on the loan, as this will impact how risky it may be to cosign.
- 1 in 6 adults have cosigned a loan at some point in their lives.
- 38% of co-signers end up having to pay some or all of the loan.
- Co-signers generally need to have a credit score of 700 or higher.
- The loan with the highest amount of co-signers is a car loan with 51%
- Cosigning a loan could help or hurt your credit depending on the financial habits of the person taking out the loan
- Cosigners are legally responsible for the entire debt
- If cosigning a loan will push your debt-to-income ratio over 50%, you should not do it
What is a co-signer?
A co-signer is a person who has agreed to guarantee the debt of another individual but does not receive any of the loan proceeds. They are responsible for the debt if the borrower does not make payments or defaults on the loan entirely.
“A co-signer serves as an additional repayment source for the lender,” said Adam Marlowe, principal market development officer for Georgia’s Own Credit Union. “They are a safety net for the lender because they are responsible for the loan in case the primary borrower fails to pay. The co-signer lends his or her good name and credit history to help another borrower obtain financing.”
You can be a co-signer for all different types of loans, including auto loans, home loans and personal loans. Having a co-signer can help a loan applicant obtain not only the loan but also more favorable terms and more money than they might otherwise be eligible for.
A co-signer serves as an additional repayment source for the lender. They are a safety net for the lender because they are responsible for the loan in case the primary borrower fails to pay. The co-signer lends his or her good name and credit history to help another borrower obtain financing.
— Adam MarlowePrincipal Market Development Officer of Georgia’s Own Credit Union
What is the difference between a co-signer and a co borrower?
There are two types of parties that can apply for a loan alongside the primary borrower: a co-signer and a co borrower. In both situations, all parties are legally responsible for the debt that’s being taken out. The credit scores and financial details of both parties are also considered in the application.
“A co borrower is a party to the loan in every sense, including being entitled to receive loan proceeds,” said Rich Tambor, chief risk officer at OneMain Financial. “Where purchase of property or a vehicle is involved, they are more likely to be joint owners, too. The co-signer does not receive any loan proceeds but is responsible for the debt if the borrower does not pay.”
While both co-signers and co borrowers take on responsibility for a loan, the two have several key differences.
“A co borrower is a party to the loan in every sense, including being entitled to receive loan proceeds. Where purchase of property or a vehicle is involved, they are more likely to be joint owners, too. The co-signer does not receive any loan proceeds, but is responsible for the debt if the borrower does not pay.”
— Rich TamborChief Officer at OneMain Financial
If you’re considering cosigning a loan for someone, it’s important to know upfront what responsibilities you will have.
|Paying back the debt||When you cosign a loan, you take on financial responsibility. If the primary borrower fails to make the monthly payments, that responsibility will fall on you. If you do not keep up with the payments, you may owe penalties, late fees and additional interest.|
|Gathering information and documents||Credit history, credit score, income, debts, employment and other financial details are all likely to be considered as part of the loan application when you agree to become a co-signer for someone. During the application process, a co-signer must gather all the related documents so that the primary borrower can submit their application.|
|Cosigner credit score may be affected||A loan you cosign will be added to your credit history, which will impact your credit score. While you are not the primary person responsible for making payments, your credit score will be affected by how promptly payments are made. This means that cosigning could help or hurt your credit score depending on the actions of the primary borrower.|
As you weigh the pros and cons of becoming a co-signer, review the rights of a co-signer to get a complete understanding of the financial implications.
|You don’t own the property||Being a co-signer doesn’t give you rights to the property, car or other security that the loan is paying for. You are the financial guarantor, meaning you must make sure the loan gets paid if the primary borrower fails to do so.|
|Face collections before primary owner||When you agree to be a co-signer, you agree that collections can hold you responsible for a defaulted loan amount. According to the Federal Trade Commission, a co-signer can face collections for the loan amount before the primary borrower.|
|Co-signer can potentially be removed from the loan||Depending on the lender, the borrower may be able to release you from the loan using a form called a co-signer release. However, this can only be done at the primary borrower’s request, and the lender must approve it.|
What should you consider before becoming a co-signer?
If you’ve been asked to cosign on someone’s loan, you should consider all the factors before agreeing. Your good credit could help a loved one achieve their financial goals, but is it a good thing for you? Here are a few things to consider before signing on the dotted line:
- The type of loan you’re cosigning for: Secured loans put collateral on the line — a house, a car or another piece of property. This might mean less risk for you because the collateral will be seized if the primary borrower cannot make their payments. However, you should consider when this is a good idea for all individuals involved. For example, a HELOC might seem like an easy way for you to help your child pay off a massive medical debt, but it also puts their house at risk.
- Your financial situation: Generally, lenders want to see co-signers with high credit scores, blemish-free credit reports and long histories of consistent, on-time payments. They’ll also want you to have steady employment and verifiable income. Does this apply to your financial scenario? If it does, are you willing to risk your high-credit status to cosign the loan?
- Your relationship with the primary borrower: You shouldn’t cosign a loan for just anyone. Think about your relationship with the primary borrower and consider how well you can trust them. Do you trust that they will make on-time payments? Or, are you worried they may not be able to keep up with the responsibilities of the loan? You’ll want to be able to have open and honest conversations with the primary borrower about money. You both need to feel good about the agreement. The last thing you want is to ruin your relationship over financial tension.
- The long-term rewards of being a co-signer – If you’re cosigning a loan to help your child go to college or build up credit early on, then the risk may be worth it in the long run. If you’re simply helping a friend pay off credit card debt or buy a car that’s outside of their price range, it’s probably not the best move for you or for them.
Personal loan lenders that allow co-signers
Most personal loan lenders do not allow co-signers. Instead, you will likely need to fill out a joint application where each person has equal responsibility for and access to the loan.
|Mariner Finance||Not disclosed||Not disclosed|
|Laurel Road||8.99% to 24.25% (with autopay)||3 to 5 years|
|SoFi||7.99% to 23.43%||2 to 7 years|
|LightStream||5.73% to 19.99%||2 to 12 years|
|LendingClub||8.30% to 36%||Not disclosed|
|Upgrade||7.46% to 35.97%||2 to 7 years|
The simplest way to find other lenders that allow co-signers is to ask. A lender may not advertise it or list it as an option in the FAQ, but if you reach out before you apply, you may be able to apply with a co-signer.
Mariner Finance, Laurel Road and SoFi all allow you to apply with a co-signer. While LightStream, LendingClub and upgrade do not allow co-signers, they do allow co borrowers and joint applications. This means that both the primary borrower and the co borrower will have access to the loan funds.
Frequently asked questions
Yes, being a co-signer for someone else’s loan can hurt your credit. To begin with, the loan will show up on your credit report. In addition, if you want to apply for a loan of your own at some point, the outstanding debt associated with the loan for which you are a co-signer will have ramifications for your loan application.
Yes, it is possible to get out of a loan if the primary borrower agrees to a co-signer release. All lenders have different criteria for co-signer release, but in general, the borrower will have to demonstrate that they have the credit or repayment history needed to qualify for the loan on their own.
It is possible to remove a co-signer without refinancing. However, in most cases, the lender will likely require the borrower to refinance the loan anyway. This is because it’s unlikely that the borrower would qualify for the same rate and terms without the co-signer.