Key learning points
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When you co-sign for a loan, you are also responsible for paying it off and promise to repay the loan if the primary borrower defaults.
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When you cosign a loan, you don’t get partial ownership of the property the money is paying for, such as a vehicle or boat.
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If the primary borrower defaults on the loan, it can lower his/her credit score as well as yours.
For individuals with a poor credit history or no credit history at all, it can be difficult to find a bad lender who will lend to them. If you get a friend or family member with a better credit history to co-sign a loan, lenders are more likely to give these individuals a loan.
But becoming a co-signer should not be taken lightly. A cosigner assumes all rights and responsibilities of a loan together with the borrower. This means that if the borrower cannot pay off the loan, the cosigner is responsible.
If you are considering becoming a cosigner with a friend or family member, consider the impact it may have on you and your financial history before agreeing to take out the loan. It’s also important to make sure you know the interest rate on the loan and calculate the monthly payments, as this will affect how risky it can be to co-sign.
Co-signer statistics
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21% of American adults have signed a loan or other credit product to help a loved one.
- 18% of those who co-signed a loan for a loved one reported losing money. Meanwhile, 20% reported damage to their credit score.
- Co-signing is more likely among parents of adult children, as they represent 29% of all individuals who have co-signed a loan to help a loved one.
- Cosigners typically require a credit score of 670 or higher and a debt-to-income ratio of less than 50% must be approved for the loan.
What is a cosigner?
A cosigner is a person who guarantees the debts of another individual. They are equally responsible for the debt and must pay if the borrower does not pay or defaults on the loan.
What is the difference between a co-signer and a co-borrower?
There are two types of parties who can apply for a loan in addition to the primary borrower: a co-signer and a co-borrower. In both situations, all parties are legally responsible for the debt that is being taken out. The application also takes into account the credit scores and financial information of both parties.
Although both co-signers and co-borrowers take responsibility for a loan, the two have some important differences:
| Co-signatories | Co-borrowers |
|---|---|
| Not having title or ownership of the property for which the funds are intended. | Stand on the title or have some claim to the property. |
| Are legally obligated to repay the loan, but this is only socially expected if the main signer falls behind. | Divide the repayment obligation equally with the other borrower. |
| Their income, assets, credit score and debt-to-income ratio must be taken into account in the loan application. | Their income, assets, credit score and debt-to-income ratio must be taken into account in the loan application. |
Co-signer responsibilities
If you are considering taking out a loan for someone, it is important to know in advance what responsibilities you will have.
| Repaying the debt | When you cosign a loan, you take on financial responsibility. If the primary borrower fails to make monthly payments, that responsibility falls on you. If you miss payments, you may owe penalties, late payments, and additional interest. |
| Gathering information and documents | Credit history, credit score, income, debt, employment, and other financial data will likely all be taken into account as part of the loan application if you agree to be a cosigner for someone. During the application process, a cosigner must gather all associated documents so that the primary borrower can submit their application. |
| Co-signer credit score can be affected | A loan you co-sign will be added to your credit history, which will affect your credit score. Although you are not the primary person responsible for making payments, your credit score is affected by the speed at which payments are made. This means that co-signing can help or hurt your credit score depending on the actions of the primary borrower. |
Rights of co-signers
As you weigh the pros and cons of being a cosigner, review the rights of a cosigner to fully understand the financial implications.
| You do not own the property | As a cosigner, you have no rights to the property, car or other security that the loan pays for. You are the financial guarantor, which means you must ensure that the loan is paid if the primary borrower fails to do so. |
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| Facial collections before the primary owner | When you agree to be a co-signer, you agree that collections may hold you responsible for any past due loan amount. According to the Federal Trade Commission, a cosigner may face collections for the loan amount before the primary borrower. |
| Co-signatories can possibly be deducted from the loan | Depending on the lender, the borrower may be able to release you from the loan using a form called a cosigner release. However, this can only be done at the request of the primary borrower and the lender must approve this. |
Things to consider before becoming a cosigner
If you are asked to co-sign on someone’s loan, you should consider all factors before agreeing. Your good credit can help a loved one achieve his or her financial goals, but is it a good thing for you? Before taking on additional debt, consider the following.
The type of loan you are co-signing for
Secured loans put collateral at stake: a house, a car or some other piece of real estate. This means less risk for the bank because the collateral will be seized if the primary borrower cannot make their payments and you do not meet your obligation. However, you should consider whether this is a good idea for everyone involved, especially if your assets are at risk.
Your financial situation
In general, lenders want to see cosigners with high credit scores, spotless credit reports, and a long history of consistent, on-time payments. They also want you to have a steady job and verifiable income. Does this apply to your financial scenario? If so, are you willing to risk your high credit rating by co-signing the loan?
Your relationship with the primary borrower
You should not just take out a loan for everyone. Think about your relationship with the primary borrower and consider how much you can trust them. Do you trust that they will pay on time? Or are you worried that they won’t be able to meet the responsibilities of the loan?
You want to be able to have open and honest conversations with the primary borrower about money. You should both feel good about the agreement. The last thing you want is to ruin your relationship because of financial strain.
The long-term consequences of co-signing
If you co-sign a loan to help your child go to college or build credit early, the risk may be worth it in the long run. If you simply help a friend pay off credit card debt or buy a car that’s out of their price range, it’s probably not the best move for you or him or her, as it could potentially hurt both of your finances.
Personal loan providers that allow co-signers or co-borrowers
Most personal loan lenders do not allow cosigners. Instead, you will likely have to submit a joint application where each person has equal responsibility for and access to the loan.
| Lender | April | Loan terms |
|---|---|---|
| Mariner Finance | Not specified | 1-5 years |
| SoFi | 8.99%-29.49% (with automatic payment) | 2-7 years |
| LightStream | 7.49%-25.99% (with automatic payment) | 2-12 years |
| CreditClub | 8.98%-35.99% | 2-5 years |
| Upgrade | 8.49%-35.99% | 2-7 years |
The easiest way to find other lenders that allow cosigners is to ask. A lender may not advertise it or list it as an option in the FAQ, but if you reach out before applying, you may be able to apply with a co-signer.
Mariner Finance and Laurel Road both allow you to sign up with a co-signer. While SoFi, LightStream, LendingClub and Upgrade allow co-borrowers and joint applications. This means that both the primary borrower and the co-borrower have access to the loan funds.
Frequently Asked Questions
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Yes, being a co-signer on someone else’s loan can hurt your credit. To start, the loan will appear on your credit report. In addition, if at any time you wish to apply for a loan yourself, the outstanding debt associated with the loan on which you are a co-signer will affect your loan application.
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Yes, it is possible to get out of a loan if the primary borrower and the lender agree to a cosigner release. All lenders have different criteria for cosigner release, but generally the borrower will be required to demonstrate the credit or repayment history necessary to qualify for the loan on their own.
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It is possible to remove a cosigner without refinancing. In most cases, however, the lender will likely require the borrower to refinance the loan anyway. This is because it is unlikely that the borrower would qualify for the same rate and terms without the cosigner.
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The co-signing process is similar to borrowing money for yourself. You will need to provide proof of identity, your social security number and other personal information, as well as proof of income and assets. Using this information, the lender will then perform a credit check to see if you meet the requirements. Although you will not receive any of the loan proceeds, this account will show up on your credit report if the borrower is approved for the loan. . That means it can affect your credit either positively or negatively, depending on how the borrower handles the account.
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Yes, when you co-sign for a loan, the additional debt increases your debt-to-income ratio – comparing your monthly debt to your gross monthly income. If your DTI becomes too high, it could affect your ability to qualify for a mortgage.
