What Does it Mean to be a Cosigner?

People often need a little help getting started financially. For example, a loan can be an opportunity for someone to get the money they need and build a healthy credit history. But it can be hard to get a loan without already having a good credit record.

If you have a friend or family member in that situation, you may want to lend a hand. With a good credit score, you could help them get a loan by being a cosigner. Before you agree to cosign a loan, make sure you understand how it works, the responsibilities of a cosigner, and how it could affect your own finances.

What Is a Cosigner?

A cosigner is someone who agrees to share legal and financial responsibility for another person’s debt. You sign an agreement with the lender that says you'll make the payments on the debt if the borrower fails to.

A cosigner is different from a co-borrower. Being a co-borrower means that besides sharing the responsibility for the loan, you also share the loaned money. Being a cosigner just makes you responsible for paying it back. You don’t get access to the money unless the borrower shares it with you.

Think of cosigning as a backstop. Ideally, the primary borrower makes all the payments. The loan eventually gets paid off without costing you a penny. In the meantime, you’ve helped the primary borrower get a loan they might not have been able to get on their own. But if the primary borrower can’t keep up with the payments, the lender will turn to you.

Cosigning gives the lender extra assurance that the loan will be repaid. That can be crucial in situations where the primary borrower doesn’t have the income or credit history to qualify for the loan. Cosigning allows the primary borrower to piggyback on your qualifications.

What Types of Loans Could Have a Cosigner?

Practically any type of loan could have a cosigner, including:

• Personal loans

• Student loans

• Auto loans

• Mortgage loans

Loans aren’t the only type of contract that can have a cosigner. You could also be a cosigner on a lease agreement or a credit card, for example.

The lender or other party to the contract must agree to accept a cosigner. Not everybody accepts cosigners—it depends on the business. You might find some lenders that are fine with a primary borrower and a cosigner, and others that only allow the primary borrower to apply on their own.

How Does Being a Cosigner Affect Your Credit?

When you cosign a loan, the effect on your credit is much the same as if you took out the loan yourself. This can be good or bad, depending on the situation.

Here are ways being a cosigner affects your credit:

• Payments show up on your credit report. This is very important, because payment history is the single biggest factor affecting your credit standing. On-time payments strengthen your credit. However, if the primary borrower misses some payments, it’s likely to hurt your credit.

• Cosigning a loan could improve your credit mix. Credit mix is a factor used in calculating credit scores. This metric looks at whether you have experience with different types of credit accounts (credit cards, mortgages, car loans, and so on). If loans are a type of credit you haven’t used much, getting one on your record could have a positive impact on your score.

• The balance owed on the loan affects your debt-to-income (DTI) ratio. When you apply for a loan, the lender looks at your income and debts to make sure you can afford the payment. The cosigned loan will count, along with any other debt payments you have to make. If your DTI is too high, lenders may not approve you for the new loan.

Freedom Debt Relief is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

What Is a Cosigner Responsible For?

If you cosign a loan, you're legally responsible for meeting any of the loan terms that the primary borrower fails to meet. This responsibility includes:

• Any loan principal that hasn't been paid back

• Interest payments on amounts owed

• Late fees and collection costs resulting from non-payment.

If the primary borrower falls behind or lets the account go into default, the lender can use the same collection methods to get money from you that it could use on the primary borrower. These include referring the debt to a collection agency, suing you, and garnishing your wages. 

Who Is Responsible for the Loan if the Borrower Defaults?

If the borrower defaults on a loan you’ve cosigned for, you and the borrower can both be held responsible for the amount owed. In fact, if the lender thinks it has a better chance of collecting from you, it may come after you for payment first. 

There's no buffer between you and the lender. When you’re the cosigner, you’re responsible for the debt. It’s as if you took out the loan yourself.

Should You Agree to Be a Cosigner?

Only agree to be a cosigner if you’re willing to pay back the loan if necessary. Hopefully, you won’t need to. But if the primary borrower can’t keep up with the payments, the debt falls to you. 

Consider the reasons your loved one needs a cosigner. Is their bad credit self-inflicted? Is their financial need truly urgent? Considering the risks, cosigning might not seem like a good move. It’s not a decision to take lightly, but there are sometimes good reasons to cosign. Here are a few arguments in favor:

• Cosigning could help meet an immediate need for someone you care about.

• Cosigning could give that person a chance to build their credit record, so they won’t have to depend on you in the future.

• If all goes well, cosigning could have a positive impact on your credit record.

On the other hand, reasons to be wary of cosigning a loan include:

• You take on full financial responsibility for meeting the loan terms if the primary borrower defaults.

• The factors that affect your credit record are at risk if the borrower doesn’t handle the account well.

• Even without missed payments, the extra debt obligation could reduce your eligibility for new credit until the loan is paid off.

If you choose not to cosign, you could help your loved one learn how to check their own credit and learn the reasons for their low scores. That way, they’ll know what factors to work on so they can eventually be in a better condition for approval without anyone’s help.

Ways to Get Removed as a Cosigner

If you don’t want to be a cosigner anymore, you could ask the primary borrower to refinance the loan. A refinance is when a loan is replaced with a new one. The primary borrower could get a new loan on their own, and use it to pay off the old loan that had you as a cosigner.

You could also ask the lender for a loan release. Not all lenders will agree to release a cosigner from their obligation. After all, the cosigner is part of the reason the lender approved the loan in the first place. However, some lenders may be open to it if the primary borrower has made enough on-time payments and improved their credit.

Another option is for you or the primary borrower to pay off the loan. While you probably don’t want to pay off someone else’s debt, it may be the way to go if you’re concerned about your credit.

How to Protect Yourself if You Want to Cosign a Loan

If you’re thinking about cosigning a loan, take these steps to protect yourself:

• Consider what you know about the person who wants you to cosign. Are they reliable and considerate?

• Look into the reason they need a cosigner. Have they handled credit accounts poorly in the past? Or did something outside their control affect their credit standing? If they’re a young adult, they may just not have been able to build credit history yet.

• Learn what you can about how they’ve budgeted to make the loan payments.

• Request copies of loan statements or online access to the account.

• Think about whether you’ll need to apply for new credit during the loan term, and whether cosigning might affect that.

• Imagine the worst-case scenario. What impact would it have on your finances if the borrower defaults and you have to take over payments? Will you end up needing debt relief?

• Check your credit reports regularly, so you’re aware of any impact the loan is having.

With these precautions, you can help the borrower and minimize the odds of hurting yourself.