What is a Cosigner?

So you're thinking of applying for a car loan, mortgage, private student loan, credit card, or any other type of personal loan? Or maybe you want to lease a home or apartment. However, you're not sure if your credit is good enough to qualify. Poor credit history or nonexistent credit doesn’t have to prevent you from getting approved for a personal loan or lease.

You might just need a cosigner.

So what is a cosigner and how can they help? Read on to learn more about what a cosigner is and when you might need one.

What is a cosigner?

A cosigner is a person who pledges to pay back your loan if you do not. In the case of a car loan or mortgage, your cosigner doesn’t receive any ownership interest in the car or home, even though they are liable to repay the loan.

A wide range of people can cosign a loan, including a spouse, parent, close family member or friend. Ideally, your cosigner will have better credit and more established finances than you, since the lender will take into account this person’s income, assets and creditworthiness when determining whether to approve your loan.

In addition, your creditworthy cosigner needs to understand and accept the financial responsibility they're taking on and be willing to make your loan payment should you fail to do so. Since this individual normally has good credit and healthy finances, your financial institution will likely lend you money. As the name suggests, your cosigner will need to sign your loan application and promise to pay back the debt if you, the primary borrower, do not.

They may also be responsible for late fees and collection costs if you do not make your loan payments on time. The cosigner’s loan term and obligations should be spelled out in a cosigner notice provided by your lender. Cosigning a loan could also impact their credit, since any missed payments or late payments reported to the credit bureaus can damage their credit history too.

If you're married and your spouse has good credit, your spouse may be able to cosign on a loan for you. However, keep in mind that having the loan on both of your credit reports will increase both of your debt-to-income ratios.

This could impact your spouse’s ability to get approved for other loans as long as your debt is outstanding. Make sure to really consider your potential cosigner and choose someone who will be able to make your monthly payment as the primary borrower should you fail to do so.

Pros and cons of having a cosigner

Having a creditworthy cosigner comes with benefits and risks - to both you and the person cosigning.

On the upside, having a cosigner with strong credit can help you get approved for a loan you might not be able to get on your own or qualify for a lower interest rate.

Moreover, as long as you repay the loan as agreed, those regular monthly payments will reflect well on your credit report and on the credit of your cosigner.

The downside of having a cosigner is that it comes with the risk of default.

If you make late payments or miss your loan payments, both your credit and your cosigner’s credit will be negatively affected. If you lose your job or are otherwise unable to make the monthly payments, your cosigner becomes responsible for repaying the cosign loan. This can cause financial stress and strain your relationship.

Do I need a cosigner?

You don’t need a cosigner if you can qualify for a loan on your own. If your lender says you need a cosigner, it means the lender will not approve the loan based solely on your income and credit. This may be the case if:

• You don’t meet the income requirements to qualify for the loan amount, or your income varies widely from month to month
• You haven’t established credit or have bad credit
• Your debt-to-income ratio is too high

Once you start looking around for a cosigner, don’t be surprised if it’s challenging to find someone willing to accept the risk. Remember, you’re essentially asking someone to risk their credit rating and financial stability so you can borrow money.

How to find a cosigner

When looking for a cosigner, you should start with people close to you that are willing to provide support. This most likely includes family and close friends that you trust and have a good relationship with. In addition, you want to find a cosigner that is in good financial standing themselves. If you choose someone that also has bad credit, you’re putting them and yourself at risk of racking up additional debts.

When asking someone to be your cosigner, be honest and upfront. Give them all of the information they need to show that you will be reliable if they become your cosigner. Also, make sure you understand how your monthly payment will work and have a conversation with your cosigner to clarify any questions.

How to get a cosigner removed

Some lenders may allow you to get a cosigner released from the loan before the loan is paid in full. A lender may consider removing the cosigner if your credit score has improved and you’ve made a certain number of consecutive, on-time payments.

The Consumer Financial Protection Bureau (CFPB) has a sample letter for requesting a cosigner release.

Keep in mind, getting a release isn’t always possible. If your cosigner needs out of the obligation and your lender will not consent to a release, your only option may be refinancing the loan with a new lender that doesn’t require a cosigner.

According to a 2015 report from the CFPB, 90% of private student loan borrowers who applied for a cosigner release were rejected, so don’t count on having your release application approved.

Alternatives to getting a cosigner

Asking someone to cosign a loan is not a step that should be taken lightly. If you don’t want a cosigner or don’t know someone willing and able to cosign for your loan, you might consider a few alternatives.

• Apply with a different lender that won’t require a cosigner or borrow the money from a friend or family member.
• Work on establishing or rebuilding your credit before you apply.
• Save up and pay cash instead of taking out a loan.
• Get a co-applicant instead of a cosigner. A co-applicant will own the home or auto along with you, so they gain an asset along with the responsibility for repaying the loan.
• Ask if the lender will accept a credit reference. If you have a history of paying utilities or rent, you may be able to ask your utility company or landlord for a credit reference confirming you have a history of on-time payments.
• Instead of applying for a credit card on your own, ask to become an authorized user on a family member’s account.

Bottom line

If you can’t get a loan without a cosigner, this might be a signal that it’s not a good time to borrow money. The lender wants someone else to guarantee your loan because they don’t think you can afford to repay it. They might be right.

Instead of putting your credit and relationship with a cosigner at risk by borrowing money, you may not be able to repay, look for alternatives you can afford on your own. You may want to consider getting a credit builder loan if you have no credit or poor credit.

Another option is to save for a larger down payment and work on improving your credit score. When your finances improve, you can reapply for another loan.

If you absolutely need the loan and must get a cosigner, look for someone who is financially responsible and understands what they’re getting into. Then take responsibility for making on-time payments every month.

Remember, a cosigner is doing you a huge favor by making it possible for you to get a loan that you wouldn’t be able to get on your own. Return the favor by paying off that debt responsibly.

About the author

Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes. See Janet on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.