What is a cosigner?

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Finding a lender who will issue a loan for someone with bad credit or no credit history can be difficult. Getting a cosigner, such as a friend or family member, with better credit history may persuade a lender to approve the loan. A cosigner is a person who applies for a loan alongside another borrower, who may be having trouble qualifying on their own. By cosigning, you enter a contractual agreement to pay back the debt if the primary borrower fails to make the payments. 

Becoming a cosigner is a big responsibility and can affect your credit, for better or worse, depending on how reliable the primary borrower is with making payments. If you’re considering cosigning a loan for someone, learn more about what it means to be a cosigner and how it can impact your financial history. 

How does cosigning work?

A cosigner is a person, often a family member or friend, who helps someone qualify for a loan or credit card by agreeing to help ensure payments are made. There could be many reasons why someone would need help qualifying, such as if they had past financial difficulties, are a student, or have minimal credit history.

For example, someone buying their first car may have difficulty qualifying for a loan because of insufficient credit history or a low income that doesn’t meet the lender’s qualifications. Lenders are often more likely to approve a loan when two people are responsible for the payments, especially if one is a highly qualified borrower. 

In this case, the primary borrower is most responsible for payments, but if they can’t follow through for some reason, the cosigner needs to make sure payments are being made—otherwise, both parties’ credit may be negatively affected.

The specific details of each loan or credit card’s cosigning terms will vary by lender, so you’ll need to do your research if you’re interested in cosigning or getting help from a cosigner.

Does cosigning build credit?

If you have minimal to zero credit history, getting a loan with the help of a cosigner can help you build credit if you make on-time payments. Payment history impacts your credit score the most. Making consistent on-time payments can raise your score and prove to lenders you’re a responsible borrower. 

If you’re a cosigner, the loan and loan payment information will be added to your credit report as well. This means that on-time payments made by the borrower (or you) can also help boost your credit. 

However, as we mentioned, late payments and high credit utilization can similarly hurt both the borrower’s and cosigner’s credit. It’s important to keep this in mind and determine how well you trust someone when considering cosigning for them. 

Cosigning vs. co-borrowing

An additional party can serve as a cosigner or co-borrower for a loan alongside the primary borrower. In both cases, each party is legally responsible for the debt being taken on. Credit scores, assets, income, debt-to-income ratio, and other financial details are also considered for all parties involved during the application process. However, cosigning and co-borrowing aren’t the same thing.

Cosigning is allowed on a variety of financial products, including student, mortgage, auto, and personal loans. Some credit cards may also allow a cosigner. As a cosigner on a loan, however, you don’t make the payments unless the primary borrower fails to, nor do you receive the principal on the loan. Being a cosigner entails:

• A legal obligation to repay the loan if the borrower falls behind
• No title or ownership of the property being funded

In a co-borrowing agreement, all parties are considered equal borrowers, meaning all borrowers receive the principal and are responsible for making payments. These agreements are commonly seen with mortgage loans. Since both applicants are considered when loan terms are being determined, the loan is more likely to be assigned a lower interest rate and higher principal. Being a co-borrower also includes:

• Some claim to the property or listing on the title
• Split repayment obligation with the other borrower

Why is having a cosigner helpful?

In the eyes of a lender, a cosigner is the backup plan for guaranteeing debt is repaid. Cosigners typically have a solid income and an above-average credit score and can help with a wide range of financial products, including credit cards, home loans, personal loans, and auto loans. Lenders are more likely to offer favorable terms when a cosigner is involved, such as a lower interest rate, lower fees, and more flexible repayment terms. 

What to know if you’re considering being a cosigner

If you’re considering cosigning for someone, knowing what to expect and the possible financial impact can help you make a better informed decision. 

1. Your responsibilities

Your financial responsibility is one of the most important factors to consider. Although the primary borrower is expected to make on-time monthly payments, that responsibility falls on the cosigner if payments aren’t being made. Late payments can also rack up more financial obligations, such as late fees, penalties, and additional interest.

Even if the borrower is someone you trust, ensuring they’re prepared and able to make the recurring payments is one way to reduce your financial responsibility.

2. The potential risks

Even if you never make a payment on a loan, as a cosigner, you’re still considered responsible for the debt and it still gets added to your credit history, where it can impact your credit. Your credit score is affected by how promptly payments are made, meaning any late payments can potentially lower your score. 

With the new loan added to your financial profile, cosigning can also affect your debt-to-income ratio and credit utilization ratio, making future loan approval harder.

However, your credit may also improve with a more varied credit mix and payments made on time and in full. Make sure to communicate with the primary borrower about the potential risks and rewards of cosigning.

3. Application requirements

During the loan application process, the lender will most likely want to see your credit report, credit score, employment, income, current debts, and other financial details when you agree to become a cosigner. Before the borrower can submit the application, you’ll need to gather all appropriate documents for the lender. 

4. Your rights

Understanding your rights as a cosigner can provide a clear overview of the financial implications before making any decisions. Your rights as a cosigner include:

• No ownership of the property: As a cosigner, you don’t have any rights to the car, house, or other investment the loan is paying for. A cosigner simply serves as financial security, meaning you’re obligated to pay the debt if the primary borrower fails to do so.
• Consequences for a defaulted loan: Your agreement as a cosigner also includes allowing collections to hold you responsible for the loan amount if it defaults. According to the Federal Trade Commission, you may face collections before the primary borrower. The same collection methods can be used against you as they would the primary borrower, such as being sued or having wages withheld.
• Removal from the loan: In some cases, the borrower may be able to use a cosigner release form, removing you from the loan and your financial responsibilities. Only the borrower is allowed to make this request, and the lender must approve it. This usually only happens if the borrower proves they have the credit and history to successfully make the payments on their own.

Should you be a cosigner?

Before agreeing to cosign a loan, consider the above and whether you’re in the right financial situation to take on this responsibility. You should also consider whether you trust the borrower and the type of loan they’re trying to qualify for.

Most importantly, determine whether the potential rewards outweigh the risks or if they should pursue other options, like getting a secured loan or working on their credit.

If you or someone you know is struggling with their credit and can’t figure out why, Lexington Law is here for support. Our services are designed to help you pinpoint what’s negatively impacting your credit so you can work to reach your financial goals. Sign up for our free online credit report consultation today for a personalized service recommendation and begin your journey to financial freedom. 

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