A co-signer is someone who agrees to take on responsibility for a loan’s repayment in the event that the borrower becomes unable to pay it back. Applying with a co-signer can help increase your chances of being approved for a loan that you might otherwise not qualify for on your own. Many first-time borrowers find that they do not have sufficient credit history to take out a loan, so a co-signer might be something they would consider.
Before asking someone to cosign a loan with you, there are several things that both you and your potential co-signer should consider:
When Might You Need a Co-Signer?
A co-signer can be helpful anytime that you think – or know – that you will not qualify for a loan based on your own finances. There are a variety of reasons someone may not qualify for a loan, including:
Keep in mind that even if your financial history qualifies you for a loan on your own, having a co-signer could potentially reduce your interest rate or allow you more favorable repayment terms. Having a qualified co-signer typically makes you a more attractive borrower. This is because the co-signer essentially “guarantees” that the loan will be repaid, making you less risky to the lender.
It is worth noting that having a co-signer does not guarantee that you will be approved for a loan. However, if a co-signer has a strong-enough financial record that they would qualify for the loan on their own, it is likely that you would be approved with them as your co-signer.
What is the Responsibility of a Co-Signer?
A co-signer legally promises to step in and make the loan payments if the borrower fails to make them, or becomes unable to make them, after the loan is approved. It is worth noting that a co-signer is different than a co-borrower. Unlike a co-signer, a co-borrower accepts responsibility for the loan right out of the gate, along with another borrower. A co-borrower also has an ownership interest in the loan. In other words, if the loan is for a car or a property, they will co-own the vehicle or home once the loan is paid off. A co-signer has no ownership interest, and in essence assumes nothing but risk.
If all goes well, a co-signer will not have to do much during the life of a loan, however they may want to check in with the borrower regularly to ensure that they are making their loan payments on time. If a borrower falls behind on their payments, it will not only affect their own credit history, but will negatively impact the co-signer’s credit as well. A co-signer should also be aware that they cannot simply remove themself from the loan. Typically the only way to be eliminated as a co-signer is if the loan is refinanced down the road, or if the co-signer’s financials have improved to the point where they can now support the loan on their own.
Potential Risks for the Co-Signer
Being a co-signer on a loan undoubtedly carries risk - especially if the borrower has had trouble paying back debt in the past. A co-signer should ensure that they fully understand the borrower’s financial history and how they can work together to ensure the loan is paid off, on time. In many cases, a co-signer is a parent or other close family member who is looking to help a borrower secure a loan and build or repair their credit history.
If you are asked to be a co-signer by someone, it is a good idea to consider whether you may need to take out any loans of your own in the near future. This is because any loan you co-sign for will appear on your credit report as well as the borrower’s, and could prevent you from qualifying for additional credit.
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