A cosigner may improve your chances of qualifying for some types of loans, but it may not be the catch-all solution every time your application needs a boost.
Usually, before you take out a loan or a line of credit, a financial institution checks to see if you meet all their requirements before offering you the cash you need.
But meeting requirements may not always be easy.
There may be a lot of things that may make it difficult to be approved for an unsecured loan or unsecured personal line of credit, including a subprime credit score, a thin credit file, and unreliable income.
A cosigner may help you in an application for a loan product if required by a lender, but finding a cosigner may not always be possible.
What does a cosigner do for a loan application? How do you get someone to be one, and are they your only option when you have bad credit?
In this post, we try to clear up any confusion!
What is a Cosigner?
If you crack open a copy of a Merriam-Webster Dictionary, the definition of a ‘cosigner’ reads as follows:
Cosigner
A joint signer of a promissory note.
This cosigner definition is simple and to the point, much like the definitions of some important financial terms you should know. In the context of a loan, it describes someone who is willing to put their name down with you on your application and contract.
By doing so, they agree to a couple of things right off the bat:
- They’ll share their personal information with the financial institution.
- The financial institution may check their credit and potentially add a hard inquiry to their file.
What Does a Cosigner Do for a Loan?
In some cases, when someone’s application is denied for a loan, it may be because of their credit score. This is one reason why you should regularly check your credit report. Keeping tabs on this number can help you understand what you qualify for before you spend time applying. Some, but not all, financial institutions may offer you the chance to apply for a loan or line of credit with a cosigner.
A cosigner is an individual who will be responsible for repayment of the debt if you are unable to meet your obligations, such as in the case of an emergency. For example, if you’re unable to make your regular payments on time, a co-signor will agree to fill in.
Once they sign along the dotted line of your contract, your cosigner is legally obligated to make your payments when you can’t. This means the financial institution may go to them to recoup the money that’s due.
While you may have no intention of relying on your cosigner in this way, having a cosigner provides some insurance to your financial institution that your debt will be repaid.
Are There Any Cosigner Requirements?
Each financial institution may have its own set of cosigner requirements.
If your cosigner is someone with poor credit, a lot of debt, and a low income, a financial institution may assume that the cosigner may not be able to cover your payments. As such, they may not approve your application if the cosigner does not do much to lessen the risk a financial institution bears.
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A cosigner needs a solid financial profile to improve your chance of approval. Generally, a financial cosigner must have the following qualifications in their profile:
- A prime credit score: Good and excellent ratings show they can pay bills on time and keep a low credit utilization rate. A financial institution may reasonably assume your cosigner will do the same for your loan or line of credit should you default.
- A regular income: Your cosigner’s income will be subject to the financial institution’s requirements as the financial institution wants to ensure that the cosigner has enough income to take on your payments in case you’re unable to make them.
Will This Affect Their Credit History?
Long before things get as dire as a default, your payment activity may have an impact on your credit history. It may also affect your cosigner’s, too.
If the financial institution reports payment activity to a major credit reporting agency, your line of credit or loan will appear in both your and your cosigner’s reports. Both your reports will show the same information.
Your report is typically affected by these factors:
- Your payment history
- How much debt you carry
- The age of your credit accounts
- The different types of credit accounts you have
- Credit inquiry information
How you end up managing these factors and your credit accounts will determine if they add positive or negative entries to your reports.
For example, paying your bills on time and keeping a low balance on your line of credit or credit card may help in building payment history. But missed payments or maxing out limits may show poor payment history.
In the worst-case scenario, missed payments may result in defaults, and defaults may have a much bigger impact on your credit score.
How Often Do Cosigners Step in?
Keep this in mind while you look for a cosigner. No matter what your intentions may be, cosigning can be a high-risk situation for whomever you ask. It’s a big responsibility that may impact their credit and pile on their bills.
How to Get a Cosigner
When disaster strikes, and you need money fast, the urgency of your situation may give you tunnel vision. For example, all you may see is the emergency medical bill waiting in your inbox, so you may not have the patience while your cosigner makes their decision. Put yourself in the shoes of your cosigner to help you identify any concerns your cosigner may have. It shows you’re serious about paying your line of credit or loan on time.
Check out these other tips to help you ask:
- Choose someone close to you — friends, family, and other close loved ones may be most likely to put their finances on the line for you.
- Choose someone who has wiggle room in their budget.
- Explain the full extent of their responsibilities to reduce the chances of something blindsiding them.
- Show you have a plan to avoid needing them to step in — prove you have the budget to make your payments on time.
- Acknowledge the worst-case scenario and what your plans will be if you fail to meet your payments.
- Be honest, considerate, and patient.
What if They Say No?
In the best-case scenario, your friend or aunt or whomever you ask says yes. But being prepared means you need to understand that they may say no. Do you have a backup in case they do?
Sometimes, it is best to re-evaluate your need for a loan or a line of credit. Can you put off a big purchase or repair until you save up the money, or is it a pressing, unexpected emergency that needs immediate attention?
If there’s no time crunch, consider tweaking your budget and waiting until you save what you need. As you wait, check out these tips for building your credit history. Having a prime score may improve your chances of qualifying for loans on your own in the future.
What Should You Choose?
Broadly speaking, there is no right or wrong answer. For some people, applying with a cosigner may be a helpful option in an emergency when their financial profile is less than perfect. But for others, it may simply not be possible.
And depending on various factors, the answer may change from month to month. Applying with a cosigner may not be the right decision today, but it could be a good fit the next time you need help getting a loan.
There are pros and cons to every financial decision, and only you can understand the true impact a cosigner may have on your finances and your relationships.
No lender can make this decision for you, but they should be able to answer any questions you have about their product in order to help you make a more informed decision.
Whatever you end up deciding, make your priority paying off what you owe on time, every time. This will help maintain your credit history and possibly your cosigner’s, too!
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
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