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. This is where a cosigner comes in. 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.
But, becoming a cosigner should not be taken lightly. A cosigner 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 cosigner is responsible. Cosigning a loan can also affect the credit score of the cosigner for better or for worse. If you are thinking about becoming a cosigner on a loan for a friend or a family member, consider the impact it may have on you and your financial history before agreeing to cosign.
What is a cosigner?
A cosigner is a person who has agreed to guarantee the debt of another individual but does not receive any of the loan proceeds. In other words, a cosigner is responsible for the debt if the borrower does not make payments or defaults on the loan entirely.
“A cosigner serves as an additional repayment source for the lender,” says 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 cosigner lends his or her good name and credit history to help another borrower obtain financing.”
You can be a cosigner for all different types of loans including auto loans, home loans and personal loans. Having a cosigner 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.
What’s the difference between a cosigner and a co-borrower?
There are two types of parties that can apply for a loan alongside the primary borrower: a cosigner 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.
After that, the similarities end.
“A co-borrower is a party to the loan in every sense, including being entitled to receive loan proceeds,” says 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 cosigner does not receive any loan proceeds, but is responsible for the debt if the borrower does not pay.”
- Have no title or ownership in the property the funds are for.
- Are legally obligated to repay the loan if the primary signer falls behind.
- Must have their income, assets, credit score and debt-to-income ratio considered in the loan application.
- Are on the title or have some claim to the property.
- Split the repayment obligation equally with the other borrower.
- Must have their income, assets, credit score and debt-to-income ratio considered in the loan application.
If you’re considering cosigning a loan for someone you know, it’s important to know what responsibilities you’ll be taking on first.
Paying back the debt
The most important thing to note is your financial responsibility. Though the primary borrower should make the established monthly payments on the loan, that doesn’t mean they always will. If they don’t, it’s your responsibility to pick up the slack. Depending on how late they are, you also may owe penalties, late fees, additional interest and more.
Gather the right information and documents to apply
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 cosigner for someone. During the application process, a cosigner will need to gather all the related documents so that the primary borrower can submit their application.
Cosigner credit score may be affected
As a cosigner, this loan 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. Any late or missed payments will likely lower your credit score.
This also means that your credit score could improve under the right circumstances. If the primary borrower manages their loan well, your credit score could go up. You may also see your credit score improve if the type of loan adds variety to your credit mix that you don’t already have.
As you weigh the pros and cons of becoming a cosigner, review the rights of a cosigner to get a fuller understanding of the financial implications.
You don’t own the property
Unfortunately, being a cosigner doesn’t give you rights to the property, car or other security that the loan is paying for. You’re simply a financial guarantor, and if the primary signer fails to repay the debt, then you’re next in line to make it happen.
You can face collections before the primary borrower
When you agree to be a cosigner, you agree that collections can hold you responsible for a defaulted loan amount. According to the Federal Trade Commission, a cosigner can face collections for the loan amount before the primary borrower.
The cosigner can be removed from the loan in some cases
Depending on the lender, the borrower may be able to release you from the loan using a form called a cosigner release.
This is a form that the primary borrower will need to sign off on releasing you from the obligations of the loan. However, only the borrower can make this request.
The lender must also approve the removal of the cosigner, which it will only do if the primary borrower can demonstrate that they have the credit and history to handle the payments.
What to consider before becoming a cosigner
If you’ve been asked to cosign on someone’s loan, you should seriously 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, consider if 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. If they can’t keep up their HELOC payments, as well as their current mortgage loan, where will that leave you?
Your financial situation
Generally, lenders want to see cosigners 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, so that you both can feel good about the agreement. The last thing you would want is to ruin your relationship with the primary borrower over financial tension.
The long-term rewards of being a cosigner
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.
The bottom line
At the end of the day, it’s important to remember what’s on the line. Though cosigning could improve your credit if the primary borrower stays current on their payments, there are also a number of risks to consider. Cosigning a loan could not only threaten your credit score, but also impact your financial prospects for many years. Take into account the full scope of your liabilities, risks and rewards before agreeing to be a cosigner.
Frequently asked questions
How do I know if I’m a cosigner?
If you’re unsure whether you’ve served as someone’s cosigner in the past, there are a few telltale signs.
“Cosigners are required to sign loan documents outlining the terms and conditions of the obligation,” says Tambor. “You must also sign and receive a copy of the Notice to Cosigner, which is a notice required to be provided to you by the Federal Trade Commission.”
The bottom line? You can’t be made into a cosigner without your knowledge and consent.
Can being a cosigner hurt your credit?
The short answer is yes: Being a cosigner for someone else’s loan can hurt your credit.
“Cosigners should understand that the loan will show on their credit reports and they are legally responsible for payment,” says Mike Boyle, vice president of loan operations at Freedom Financial Network, a debt relief company. “In addition, if the cosigner wants to apply for a loan on his or her own — whether a mortgage, vehicle, personal or something else — that outstanding debt could have ramifications for the application.”
How do I find a cosigner?
Choose someone who is close to you and that you trust to help you make a financial decision. Friends and family are the most common cosigners, but make sure the person you choose has a good credit score and history.
Can I pay for a cosigner?
Paying for a cosigner is an uncommon approach, but for some people, there aren’t many other options. Cosigning companies exist, but they generally have questionable reputations. For instance, Cosigner Finder has an “F” rating from the Better Business Bureau. In short, hiring a cosigner you’re not familiar with can be risky.
Can a cosigner get out of a loan?
Yes, it is possible to get out of a loan if the primary borrower agrees to a cosigner release. All lenders have different criteria for cosigner 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.
Can I remove a cosigner without refinancing?
It is possible to remove a cosigner 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 cosigner, Marlowe says.