If you have less-than-stellar credit or no credit history at all, you may still be able to get a loan. Whether it’s a credit card, student loan, or personal loan, adding a cosigner to your application may help you get approved.
However, there are stipulations that come with getting a cosigner. It’s important to understand what a cosigner does for you and what risks your cosigner undertakes before signing the dotted line.
What is a cosigner?
A cosigner is a person who agrees to add their name to your loan in addition to yours. Though you are the primary borrower, a cosigner is equally responsible for paying back to the loan — they’ll need to repay the debt if you can’t.
This also means their credit is on the line. If you make on-time payments, both your credit and theirs could increase; if you miss payments, both your credit and theirs will be negatively affected.
Who can be a cosigner?
Anyone can act as a cosigner on your loan, but it’s most common to ask a family member or friend who you trust to cosign. You should have an established relationship with this person — after all, you’re asking someone to be on the hook for a loan you’re taking out.
When choosing a cosigner, opt for someone who is creditworthy. That’s because a cosigner is meant to improve your chances of getting approved for a loan. Adding someone with excellent credit to your loan application shows the lender that there’s a responsible borrower in line who is likely to repay the debt if you can’t. In some cases, you may be able to get a lower interest rate or better terms if you have a qualified cosigner.
Certain factors may increase your chances of needing a cosigner. If you have poor or no credit history, or low or variable income, for example, adding a cosigner could help your application.
Lenders who require you to have a cosigner will only do so if you cannot qualify for the loan by yourself. For instance, an 18-year-old applying for a private student loan is likely too young to have established a thorough credit history, so they may need a parent to cosign the loan.
Pros and cons of using a cosigner
Using a cosigner for your loan can benefit the both of you. However, there are some potential downsides as well.
- Save money: You may be able to get better rates if you have a cosigner who has excellent credit, meaning you could pay less interest over the life of the loan.
- Better chances of approval: A cosigner with good credit can help you get approved for a loan you may have been denied for on your own.
- Build credit history: If you diligently make on-time payments, your credit will be positively affected. It could also help your cosigner’s credit when you pay back your debt as agreed.
- Your cosigner is on the hook for your debt: Since your cosigner is responsible for your loan, they could be stuck paying back thousands of dollars on your behalf if you can’t make payments.
- It could put pressure on your relationship: You and your cosigner could be at odds if you find you can’t pay back your loan or fall behind on payments.
- The loan could affect your cosigner’s credit: If you fail to pay your loan on time, your cosigner’s credit could be affected negatively — potentially making it harder for them to get their own loans in the future.
How to work with a cosigner
Using a cosigner is a decision that shouldn’t be taken lightly. After all, you’re asking someone to be liable for a loan you take out. When you approach someone to be a potential cosigner, make sure you talk about what they’re responsible for, how you intend to pay back the loan, and any other relevant details that would help convince them you intend to be a creditworthy borrower.
When you apply for a loan, you can typically add a cosigner when you start your application — this person typically needs to be at least 18 years old and a U.S. citizen. You’ll also need your cosigner’s personal information, such as their full name, address, Social Security number, and income information.
Once your loan is approved, make sure you regularly communicate with your cosigner. For example, your cosigner would probably appreciate it if you let them know important details, such as when you make your monthly payments or if you’re finding it hard to repay the loan.
Tell your cosigner about any potential financial challenges so they can help you come up with possible solutions before you miss a payment.
In some cases, you may eventually be able to remove a cosigner from your loan. Requirements may differ from lender to lender, but in most instances you can do so by submitting a written request and meeting certain conditions.
This can include making a certain number of on-time payments, showing proof of regular income, maintaining a satisfactory credit history, or providing other data that shows you can be responsible for the loan on your own. Some student loans, such as those from Sallie Mae, may require borrowers to graduate before applying for a cosigner release.
Managing your loan
It’s crucial that you manage your loan responsibly when you have a cosigner. This person is doing you a favor by helping you get approved for a loan you may not have otherwise.
If you fall behind on payments, it will show up on your credit report as well as your cosigner’s. Plus, your cosigner is contractually obligated to pay back your debt, putting them at risk if they can’t afford it.
Before applying for a loan, check your finances to see if you can afford to take on more debt. Be honest with yourself — is this something you can handle? Consider carefully before proceeding because you’ll want to be able to manage your payments and make your cosigned loan a priority in your financial life.