How does co-signing a loan work

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By CreditNinja
Modified on March 7, 2024

Cosigning a loan is when someone agrees to sign onto a loan with you and take over the financial obligations of the loan if you should fail to pay. This is a common practice for many different kinds of loans and something that lenders may ask for if your credit score is somewhat low.

A cosigner is basically a third party that agrees to take over a loan if the initial borrower can’t repay the loan. Usually, a cosigner is a very close family member like a parent, or maybe a close friend. This is because cosigning a loan is a big responsibility for the borrower and the cosigner, whether it’s for auto loans, mortgages, or personal installment loans. It’s definitely not a decision to take lightly if you’re considering using a cosigner.

But why use one at all? Why not just get a loan on your own? Well, unfortunately, some people aren’t eligible for loans and credit cards due to their past borrowing history. If they’ve missed payments in the past, defaulted on loans, or have a tremendous amount of credit card debt then most lenders will consider them to be untrustworthy borrowers. Using a cosigner adds an extra layer of security for the lender. It helps eliminate some of the risks of lending to someone who may not be “creditworthy.”

Cosigners can be used for many different types of loans and financial products. They’re commonly used for things like auto loans, mortgages, large personal loans, and more. A lender may review your credit history and your application and if they aren’t confident in your ability to repay they may ask if you’re able to secure a cosigner. If you aren’t able to get a cosigner you may not be approved for the loan depending on the specific loan, lender, and situation.

Just remember to thoroughly review all of your options before deciding to use a cosigner. Failing to make payments on that loan and forcing your cosigner to take action can result in several negative outcomes. You may see a drop in your credit score, and you could also damage your relationship with the cosigner.

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