If you’re unfamiliar with standard loan terms, you might wonder what is a co-signer. Many people who can’t obtain a loan on their own look for alternatives that might help them qualify. Adding a co-signer to your loan application is a viable alternative in most cases.
Not all lenders or loan types accept applications with co-signers. If you’re thinking about asking someone to co-sign a loan for you, be sure that your lending institution allows it.
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What Is a Co-Signer?
A co-signer accepts the responsibility of repaying a loan if the primary borrower can’t or doesn’t. Say you apply for a loan, but you don’t have good approval odds. You can ask your friend Sue to co-sign the loan with you, so the lender feels more comfortable about your ability to repay the debt.
If you fail to make payments, the lender can turn to Sue to make them. Sue probably didn’t have access to the loan proceeds, but she is liable for the entire amount of your debt.
When you use a co-signer to obtain a loan, you’re basically using their credit. You’re asking them to take on this heavy responsibility, so think carefully before you approach them. Delinquent payments or missed payments will adversely affect their credit as well as yours.
Lenders typically focus on your co-signer’s good credit instead of your weaker credit, but not always.
Is a Co-Signer the Same as a Co-Borrower?
Although the terms sound similar, a co-signer is not the same as a co-borrower. When a co-borrower signs for a loan with you, you own the proceeds jointly. Each applicant is responsible for the total debt if the other fails to pay. Married couples often apply for loans as co-borrowers.
How Do Lenders Decide if They Will Offer a Loan?
Every lender has its own requirements for loan applications, so you’ll need to find out what they are for the financial institutions you deal with. However, most lenders look at these factors:
- Your credit score
- The length of your credit history
- On-time payment history
- The types of loans you have currently or in the past
- Your income and cash on hand
- Your debt-to-income ratio
- The amount of the loan you’re requesting
Lenders may also consider your work history, including the length of time you’ve been at your current job. Those who are self-employed are generally considered a higher risk.
You can ask lenders to look at your personal information to see if you have good approval odds for a loan with a reasonable interest rate. If you don’t, ask if adding a co-signer might help.
- If your credit score is low, a co-signer with a better credit score may significantly improve your chances of getting a loan.
- Those with no or short credit histories have better approval odds if someone with a lengthy credit history co-signs the loan.
- If your income isn’t high enough to qualify for a loan on your own, adding a co-signer — and their income — to your application can push your total income into the acceptable range.
- Adding a co-signer with a better debt-to-income ratio to your loan application may reduce the total DTI.
For loans that have collateral, such as auto or mortgage loans, the co-signer doesn’t own this property.
How Can a Co-Signer Help You?
There are a number of situations in which you might consider asking someone to co-sign a loan:
- Your credit score is too low.
- Your debt-to-income ratio is too high.
- You don’t have enough income.
- You don’t have a long enough credit history.
Lenders may consider people in any of these situations a high risk and unlikely to repay a loan. If this applies to you, or if the interest rate offered by a lender is too high, you can ask someone to co-sign your loan.
What Does a Co-Signer Have To Do?
In most cases, your co-signer will need to fill out an application. They’ll need to furnish the same kinds of personal information as you do, such as their Social Security number, income, employment history, and assets.
You can verbally reassure them that you’ll pay your debt without involving them, but a written and notarized agreement can go a long way toward making a potential co-signer more comfortable about taking the risk.
What Qualifications Should a Co-Signer Have?
Co-signers are usually family members or close friends. Each lender and loan type may have different qualifications, so find out what those are. In general, a co-signer should meet these requirements:
- A credit score of at least 670
- Enough qualifying income to repay the loan themselves
- A debt-to-income ratio of 50% or less
What Kinds of Loans Accept Co-Signers?
Because every lender has its own policies, check to see if it allows co-signers on loan applications. In general, you can have a co-signer on most types of loans. Your interest rate and monthly payment amount will likely be lower if your credit isn’t great and your lender lets you include a co-signer on your loan application.
When you purchase a vehicle, you’ll likely get a loan to pay for it. Dealerships often have multiple financial institutions that they deal with, so they may send your loan application to several lenders for consideration. You can look for auto loans from banks, credit unions, and online lenders if you prefer.
Auto loans are secured, meaning that the lender has a lien on your vehicle. If you default on your loan, the lender can repossess it. However, you and your co-signer may still be liable for the remaining balance on your loan.
Another adverse effect of repossession is that it can seriously impact your credit score, typically for seven years from the last payment you made on your loan. It can put multiple negative items on your credit report, including:
- Late payments
- Defaulting on the loan
- Court judgments
Your co-signer will face the same impact on their credit score if a lender repossesses your vehicle.
Business Start-Up Loans
If you’re opening a new business, your company has no credit history. Lenders base their decisions on many factors, including credit history. Lenders may require that you have a co-signer for a business startup loan. This person should have assets to use as collateral if necessary, along with a very high credit score.
People with credit issues or short credit histories may find it hard to get a credit card. If they do receive offers, the credit limits are usually low and the interest rates high.
You can ask someone to co-sign a credit card application if the issuer allows it. This doesn’t mean that your co-signer will have access to your card. However, they are still responsible for repaying your balance if you fail to do so.
Debt Consolidation Loans
Many consumers have multiple high-interest credit cards, small loans, and other lines of credit. If you have balances on several accounts, your monthly payments and interest charges add up quickly. Combining these debts into a debt consolidation loan can substantially reduce your monthly payment obligations and interest rates.
Some lenders require that they pay off your outstanding balances rather than disbursing the funds to you directly. This assures them that you’re using the funds for your stated purpose and that your debt-to-income ratio won’t increase.
If you obtained a debt consolidation loan but didn’t use the proceeds to pay off those debts, the total amount you owe would increase, and the likelihood of you repaying the consolidation loan would probably decrease.
Home Equity Loans
Many homeowners who need cash borrow against the equity in their homes. You can only borrow up to the amount of equity you have, and the lender will place a second lien on your property.
Though you own your home, that’s not enough to qualify you for a home equity loan. You also need sufficient income and a high enough credit score. Lenders might offer you a loan but with unfavorable interest rates. Adding a co-signer to your application can lower those rates.
Your co-signer’s name doesn’t have to be on your home’s deed. However, the lender can require payment from them if you stop making payments.
Mortgage loans are typically large. Some people might qualify for a mortgage independently but face higher interest rates, lower loan amounts, and more substantial down payments.
A well-qualified co-signer can help in all those areas. You’ll typically find that a co-signer will benefit you the most if your income isn’t enough for you to get the loan amount you want. You probably want to qualify for a larger loan so you can buy a nicer home.
Mortgage lenders usually base decisions on the lower credit score on an application. If your credit score is truly bad or you’ve had a bankruptcy or foreclosure, having a co-signer might not get you approved for a mortgage. Young people without a credit history who include a well-qualified co-signer on their mortgage application can usually get a loan.
These days, many lenders conduct business solely online. Although any lender can accept or deny applications made with a co-signer, you can probably find an online lender for the type of loan you’re looking for.
You can typically use personal loan proceeds for anything, such as home improvement projects, unexpected expenses, weddings, or vacations. These loans are usually unsecured, meaning that the lender doesn’t have a lien on any collateral to back your loan. Because the lender can’t repossess your car if you don’t make payments, for instance, they take more of a risk when they issue personal loans.
Most financial institutions and online lenders offer personal loans. Each sets its own criteria, repayment terms, interest rates, and co-signing options. Interest rates for personal loans are generally higher than those with collateral, and repayment terms are often shorter. Qualified co-signers can make these more reasonable.
Private Student Loans
Many college and graduate students use loans to pay for at least part of their tuition and other related expenses. Young students applying for private student loans aren’t likely to have a credit history and find it difficult to obtain a loan on their own.
While most private student loan co-signers are parents, other people can also co-sign these loans. You can usually have only one co-signer even if both parents are willing. Your co-signer doesn’t have to live in the same state.
If you fail to pay your loan, your co-signer is responsible for paying the entire loan balance.
What Is a Co-Signer Risking?
When someone co-signs a loan with you, they are tying their credit to that loan until it is paid in full. An adverse payment record will cause their credit score to drop. Other potential risks include:
- This loan factors into the co-signer’s DTI, which might prevent them from obtaining a loan themselves.
- If the debt is unpaid and sent to a collection agency, that debt collector will pursue them.
- A lawsuit filed to collect the debt can include them.
- If your co-signer helps you buy a car, for instance, and you don’t make payments, they are responsible for paying the loan even though they don’t own your car.
- They can’t remove themselves from the loan.
If you are confident that you can repay a loan by making on-time payments, asking someone to co-sign for you can help you. However, if you don’t fulfill your obligations, it can damage your relationship along with your financial situation.
How Can Fiscal Tiger Help?
Fiscal Tiger is an online resource for various financial topics. Now that you can answer the question “what is a co-signer?” with confidence, you can find other articles about obtaining loans on our website. Whether you have bad credit and want to improve it, don’t have a credit history, or have other financial difficulties, we have information available to help you.
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