Basically, a cosigner loan is such that a “co-signer” adds their name to the primary borrower’s loan application.
The co-signer becomes legally responsible for the loan amount and any additional fees if the primary borrower is unable to make their repayments.
Co-signing a loan with someone who has more solid credit or a higher regular income may be preferential if you’re struggling to qualify for a loan yourself, or perhaps to try and get a lower interest rate on the loan.
What is a Cosigner?
A co-signer is simply someone who adds their name to the deed of the loan.
The cosigner will assume responsibility for paying off the loan and any additional fees that have been incurred should the primary borrower encounter any issues paying off the loan, in full, by themselves.
Unlike a joint loan in which two borrowers have equal access to the loan, in a co-signed loan, the co-signer has no right to the money even though they could be on the hook for repayment.
Who is a Cosigner?
A cosigner can be anyone who qualifies, and your lender will determine whether or not they do indeed qualify.
However, typically, a co-signer will be someone who you can rely on financially, i.e. someone with stronger credit or a more stable income than yourself, as this is someone you will need to rely upon if you have any issues making your loan repayments yourself.
Interestingly, statistics show that 37% of payday loans are taken out by young people between the ages of 18-25. If this is the case, getting a cosigner on your payday loan could definitely be advisable, as a parent or older family member will have had more years to build up a stronger credit history.
Additionally, if you are of retirement age, i.e an OAP over 65 years old, you may want to consider getting a cosigner on your loan. Lenders do consider other forms of income as proof of credit, such as pension plans, but should you find yourself unable to repay your loan, a cosigner could be of great help, as the last thing you’d want is for your pension to start diminishing.
What are the Benefits of Having a Cosigner on a Loan?
The upsides of cosigning a loan for someone can be of great help for the borrower in question. You could be helping them qualify for college tuition, a credit card or some other financial product they could not get on their own, or save them interest with a lower rate.
When someone is new to credit or is rebuilding their finances, having a cosigner with a good score and an established credit history is a strong tool to help qualify for a plethora of financial products and services that they may not previously have been able to qualify for.
However, not all short-term, online lenders allow co-signers, so it’s worth checking before you apply.
What are the Risks of Having a Cosigner on a Loan?
Cosigning a loan comes with many upsides for the primary borrower, but there aren’t too many for the cosigner, aside from being able to help the borrower.
You are responsible for the entire loan amount.
This is the biggest and most obvious risk; cosigning a loan is not just about lending your good credit reputation to help someone else. It’s a promise to pay their debt obligations if they are unable to do so, including any late fees or collection costs.
Before you co-sign, assess your own finances to ensure you can cover the loan payments in case the primary borrower cannot.
Your credit is put on the line.
When you co-sign a loan, both the loan and payment history show up on your credit reports as well as the borrower’s.
In the short term, you’ll see a temporary hit to your credit score. The lender’s hard credit check before approving the loan will temporarily hit your score and so could the increase in your overall debt load.
Most importantly, though, any missed payments by the borrower will negatively affect your credit score.
Your relationship could get damaged in the process.
The primary borrower may start out making full, on-time payments toward the loan or credit card with good intentions. But financial and personal situations change.
Young people who run into trouble with payments toward a co-signed credit card or car loan may hide the shortfall from their parents until the situation worsens, ruining trust in the relationship.
Can Cosigning a Loan Build Credit?
Being a cosigner can actually help you to build your credit.
Firstly, as long as payments are made on time, it adds to your payment history. However, if you have a good score and well-established credit, the effect may be small compared with the danger to your score if the borrower doesn’t pay.
Additionally, the person you cosigned for can build their credit in the process.
It can help them qualify for credit they otherwise would not get, boosting a thin credit file. Also, making on-time payments on the account builds up a good payment history.
Does Cosigning Hurt your Credit?
Being a co-signer itself does not affect your credit score. Your score may, however, be negatively affected if the main account holder misses payments.
Missed or late payments.
Co-signers are required to make payments on the account if the main account holder misses payments. If the consignee makes late payments, or misses them altogether, then your credit score could drop.
You could end up owing more debt.
Your debt could also increase since the consignee’s debt will appear on your credit report. The amount of debt that you currently owe will increase and will be added to the “amounts owed” portion of your credit score.