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What is a cosigner? Does it help you qualify for a loan?
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Finding a good lender can be a challenge if you have a less-than-perfect credit score or little to no credit history. That’s when the concept of a cosigner helps. A friend or a family member can cosign a loan with you – provided they have a better credit history, a stronger credit profile, and a history of consistent, on-time payments. This arrangement will make the lenders more likely to grant you a loan. Find out more about who or what is a cosigner and its pros and cons.
Keep in mind that becoming a cosigner for someone or choosing one should not be taken lightly. When a cosigner agrees to sign a loan, they assume the same level of accountability and responsibilities as the borrower. In other words, if the borrower is unable to repay the loan, the cosigner will be liable for the debt.
Apart from the risk of cosigning, it can also have a deep impact on the cosigner’s financial history.
What is a cosigner?
A cosigner shares equal responsibility for a loan as the primary borrower and can strengthen the latter’s loan application – reassuring the lender that the loan will be repaid even if the borrower defaults. The individual is a financial guarantor who must ensure that the loan gets paid in the right way. This assurance is particularly useful when trying to make a large purchase, such as a house or a car.
The cosigner agrees to pay the missed payments (or the full amount of the loan) if the primary borrower defaults on the repayment. This will of course negatively affect a cosigner’s credit scores since the loan will be reported on credit reports issued by the three nationwide credit bureaus.
That’s why it’s extremely crucial that if you’re cosigning for a family member or friend, you know exactly what you’re committing to – making the payments if the borrower does not follow through.
Why a cosigner?
If you are unable to qualify for a loan on your own, you may consider having a cosigner, who agrees to take legal responsibility to pay the debt if you, the borrower, fail to do so as agreed. A cosigner helps a loved one achieve their financial goals using their excellent credit.
Oftentimes, a co-signer is a family member or a close friend. Having a cosigner gives your loan lender good assurance that the loan will be repaid – promptly and in full.
What does a cosigner do?
If you do not qualify for a mortgage, personal loan, auto loan, student loan, or credit card on your own, having a cosigner can be helpful. This individual shares responsibility for the debt and agrees to cover any loan debt or credit card payments, along with any associated fees, if the primary borrower cannot do so. Keep in mind that while the cosigner is legally obligated to make failed payments, they do not have any rights to the loan proceeds.
What is the difference between a loan cosigner and a co-borrower?
When applying for a loan, a primary borrower can have two other parties join in – a cosigner and a co-borrower. Regardless of which option is chosen, all parties are held legally accountable for the debt. Additionally, the credit scores and financial information of both parties are taken into account during the loan application process.
A big difference between a co-borrower and a cosigner is that a co-borrower is entitled to receive loan proceeds and maybe a joint owner. A co-borrower is on the property title or has some claim to the property. They may choose to split the repayment obligation equally with the other borrower.
The cosigner, on the other hand, does not receive any loan proceeds, title, or ownership of the property.
What are the responsibilities of a cosigner?
It’s crucial to understand your obligations beforehand if you’re contemplating cosigning a loan for someone.
You will have to
- Share sensitive details such as your credit history, credit score, income, debts, and employment history for the loan application process.
- Pay back the debt if the primary borrower fails to make the monthly loan payments.
- May owe penalties, late fees, legal issues, or additional interest in case of a default.
- Be ready to have the loan added to your credit history. It could help or hurt your credit score depending on how prompt and regular the primary borrower is.
- Prepare yourself for collections in the event of a defaulted loan amount.
What are the pros and cons of cosigning a loan?
Cosigning a loan is similar to borrowing money for yourself. It can have both advantages and disadvantages.
- Help a friend or family member who may not be able to get loan approval on their own.
- Improved chances of loan approval.
- May lower the interest rate on the loan.
- Timely repayments can help build a good credit history.
- Cosigning a loan means you are responsible for the payments if the borrower cannot make them. If the borrower defaults on the loan, it will bring down the cosigner’s credit score drastically.
- The loan will appear on the cosigner’s credit report, which could impact their ability to get credit in the future.
- If the borrower cannot make the payments, it could cause tension and damage the relationship between the borrower and the cosigner.
- A cosigner has no control over how the borrower uses the loan.
What to remember when becoming a cosigner?
Before agreeing to cosign a loan, you must decide if you are willing to risk your high-credit status to cosign the loan.
Your credit report, income details, debts, identification, Social Security number, and other personal details will be under scrutiny. The lender will run a credit check on you. Any default can put your finances and future investment plans in jeopardy.
It could jeopardize your loved one’s finances – depending on the type of loan. For example, a secured loan such as a home equity loan or a home equity line of credit aka HELOC puts the collateral (a house, car, or any other property) on the line. While this may put you in a less risky spot, it might be bad news for the primary borrower.
As you agree to be a cosigner, consider the fact that your relationship with the primary borrower may be fraught with financial tension. Do not cosign a loan for just anyone. Always do it for someone you explicitly trust – in good faith that your friend or family member will make on-time payments and fulfill their obligations.
What is the best way to find a cosigner?
The best way is to ask your financially stable family and friends. They should have a steady source of income and a good or excellent credit score. Always be honest and upfront about their rights, responsibilities, and the things they might be putting in line for you.
When should you not become a cosigner?
- If your credit history is not great enough to get good rates and terms of the loan for the borrower.
- If your financial situation is not strong enough to repay the borrower’s debt if required.
- You are planning to buy a home yourself.
- You don’t want to put your relationship at risk over money matters.
Is there an alternative to cosigning a loan to help out?
There are various ways to assist someone in obtaining funding without becoming their cosigner. You could help them improve their credit score, allow them to become an authorized user on your credit card, or loan them money personally.
Can a cosigner opt out of a loan?
A cosigner release form to remove a cosigner may be available with the lender, depending on their policy. It’s important to note that only the primary borrower can initiate the process and it requires the lender’s approval. Keep in mind that the borrower may not qualify for the same rate and terms without the help of the cosigner.
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