About 40% of co-signers find themselves responsible for at least part of the primary borrower’s debt. While this can sound alarming, this is the very reason why there are co-signers. Some borrowers are not in a financial situation to secure a loan, so a co-signer gives them access to the funding they wouldn’t otherwise have access to. Learn about co-signing impacts and benefits to decide if it’s the right lending option for you.
What Is a Co-Signer?
A co-signer is someone who agrees to apply and sign for a loan with another individual. The co-signer agrees to be contractually responsible for the loan if the primary borrower doesn’t make the agreed payments.
This person acts as extra security and backup for the lender. Typically the co-signer has a stronger financial history and better credit score than the primary borrower. This gives the lender greater confidence that they will get their loan funding back.
How does a Loan With a Co-Signer Work?
The primary borrower fills out the loan application with the co-signer. The lender will consider both the primary borrower and the co-signer when determining approval and loan terms. In most instances, the lender will offer better interest rates and terms. In addition, the lender will consider financial history, debt-to-income ratio, and the loan amount requested. Once approved, the lender will provide loan documents. Both the primary borrower and the co-signer need to sign the documents.
The primary borrower takes over making the monthly payments. The on-time payments then get reported to the credit reporting bureaus. This benefits both the primary borrower and the co-signer. The lender will contact the co-signer if the primary borrower fails to make the required payments. It is then the co-signer’s responsibility to commence making payments.
Loan Requirements for the Borrowers
The requirements can vary significantly depending on the type of loan and what it is for. Car loans are a popular loan that people get co-signers for. These loans are easier to secure because the amount is lower, and the car serves as collateral. Another common loan that has a co-signer is real estate purchases. These loans have more requirements because the loans are significantly larger. Additionally, real estate is subject to changing market values.
Co-signing Impacts and Benefits
A co-signer is typically someone that you trust, such as a close friend or family member. The co-signer doesn’t get any benefit from the loan. However, they agree to potentially take on all of the liability. The lender will turn to the co-signer if the primary borrower fails to make a payment. This means that the co-signer is putting their own credit score and report on the line to help someone else. The co-signer’s score could drop if the primary borrower doesn’t make a payment.
Additionally, the loan goes on the co-signer’s credit report. This means that future lenders will see the loan, and it could prevent the co-signer from securing future financial funding. Lenders may be concerned that the co-signer will need to pay the loan and be hesitant to lend the co-signer money.
Secure a Loan with a Co-Signer
If you struggle to secure a loan on your own, you may need a co-signer. Look to the people you know and trust and that trust you. Asking someone to co-sign a loan is a big deal, so you want to think about this carefully. Show them that you are financially able to repay the loan. Be open and honest about why you need a co-signer and your current financial situation.
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