What is cosigning a loan?

Cosigning a loan happens when the cosigner takes legal responsibility for the credit account. For example, if your credit score isn’t good enough for a good interest rate, you could get a cosigner on your loan to boost your credit image for lenders. As a cosigner, you help someone else qualify for a loan that they might not have been able to get by themselves. 

 

You would need a cosigner if you’re applying for a loan that you might have some trouble meeting all the requirements for. Make sure that you’re cosigning with someone you can trust and that understands their respective responsibilities. For example family members, spouses, or close friends that you’re in frequent contact with, are good options. 

 

Cosigner loan requirements

To be a cosigner you will need: 

  1. Good or Excellent credit score between 670 or higher
  2. Good payment history means no missed payments
  3. A clean background free from credit-related problems like fraud or evictions
  4. A qualifying income that can cover loan repayment if necessary
  5. Stability in your financial position
  6. Willingness to pay the loan if the borrower is unable to

 

Risks of cosigning

  • You take on the responsibility of making sure the loan is paid. This means that if a payment is missed, it affects you as well. If the primary borrower defaults on the loan, then it is your responsibility to pay the loan back. 
  • Your credit reports will show the loan and any consequences suffered from missing payments or defaults. 
  • Your own credit score can drop due to mismanagement of the loan by the primary borrower. 
  • Your debt-to-income ratio increases due to the added debt. This could affect your own chances of getting approved for a loan. 
  • You’re legally responsible for the loan, meaning that you are liable if the debt goes unpaid and the lender wants to sue you. 
  • It’s not easy to stop cosigning once you are brought on. If the primary borrower begins to let things slack, you can’t escape the loan. Unless there’s refinancing or the borrower takes the loan on without you. 

 

Benefits of cosigning

  • For the primary borrower, the benefit is that you will be able to qualify for a loan with good interest rates or loan terms that you might not have been approved for alone. 
  • If the loan is paid on time and managed correctly, the cosigner can also benefit from a good credit history. 
  • If you as the cosigner understand the loan, can pay it off if need be, it won’t interfere with other financial goals you have, then it makes sense to cosign. 

 

Alternatives to cosigning a loan

If you can’t find anyone trustworthy to cosign or you want to cosign but are unable to, there are a few alternatives. You could take out a credit builder loan if you’re trying to apply with a bad credit score. Or as someone who wants to help out, you could lend the borrower some money or take out a loan yourself. Although this places more risk on you. 

 

Before taking on a cosigner, or cosigning a loan, fully assess its effect on your financial position by weighing the pros and cons.