When looking into loans, you may have heard of cosigning before. But what exactly does cosigning on a loan mean? On a basic level, cosigning on a loan means signing up for someone else’s loan to help increase their chances of getting loan approval. There are certainly more things you will need to know about cosigning, especially if you are thinking about becoming one or asking someone else to cosign for you. Continue reading to learn more about all the details you need to know about cosigning on a loan.
More Details on What a Cosigner Does
Although knowing the primary role of a cosigner can be helpful, a more in-depth understanding can help you make a financially sound decision if you are considering taking on that role. Being a cosigner also means signing up for a credit check (from all three credit bureaus) and an initial application. A cosigner will not have to make monthly loan payments on the loan unless the primary borrower defaults. Their credit score will be impacted by the loan itself, along with the payment history on that loan.
In most cases, a cosigner is usually a spouse, family member, or close friend. A personal loan with monthly payments, a car loan, credit card debt, and even mortgage loans may allow a cosigner to be added to the personal loan agreement.
The Steps of Becoming a Cosigner?
Thinking of becoming a cosigner for someone? Here is what the process will entail:
1: Complete All the Loan Paperwork
The first step of the process is to fill out a loan application. Usually, the primary borrower will send you a link to your portion of the application; it is generally available after they put in their information. For most loans, you will have to add your personal information, such as your name, address, birthdate, phone number, and social security number. You also have to agree to a hard credit inquiry—the type that impacts your credit score. In this application, you can see the loan amount and general repayment terms.
2: Find Out About Approval
At this point, the primary borrower will need to submit the application. They will then find out about the final approval, including the approved loan amount. The wait time will depend on the lender and loan type. Once approved, the primary borrower can consult with you on whether to move forward, but they don’t have to.
3: Wait for Repayment
Once the loan proceeds are made available, the primary borrower will have to begin repaying the loan. As a cosigner, although you will not automatically be taking on the financial responsibility for payments, it will be essential to keep track of them.
What Are the Requirements To Be a Cosigner?
To be a cosigner, you must have an excellent or good credit history. Additionally, you will need to have some sort of income that you can show to a lender. When cosigning for a loan or credit card, you are the guarantor that the funds will be repaid. This guarantee from you will help make up for the borrower who doesn’t have a good credit score or meet the minimum income requirements. Thus, a lender will expect the cosigner to have a better financial standing than the primary borrower.
Factors To Think About When Becoming a Cosigner
Although cosigning a loan is supposed to be a passive financial move and does not automatically mean that you will have to pay back a debt, it can lead to certain scenarios that can harm your finances or cost you. Here are some of the responsibilities and situations cosigning for a loan can lead to:
Missed Payments and Default Mean Hurting Your Credit Score
If the primary borrower makes even one late payment and you are the cosigner, it will hurt your credit score and credit history. Multiple missed payments can be even more detrimental and lead to loan default, which can hurt your credit score even further. These actions will also show up on your credit report for up to seven years.
You Will Be Responsible for Loan Repayment if the Primary Borrower Cannot
About 38% of all cosigned loans end in default.1 If that happens for a loan you cosigned, then you will be legally responsible for paying it back. Whether that means a single payment or the borrower stops paying altogether. And depending on the loan, this could be a substantial financial burden!
For example, if someone you cosign for takes out thousands of dollars but cannot repay the loan, you will be responsible for repaying the loan. Having a few hundred dollars in loan payments each month can really turn things upside down for your own finances. Not to mention paying back someone else’s debt and the impact on your credit score and credit reports from multiple missed payments.
What Can Happen if Both Parties Cannot Repay the Debt?
Let’s say both parties—the primary borrower and cosigner—cannot repay the loan. There are few things that the lender can do, and either borrower may be able to pursue. It is always best to handle the situation before the lender takes action. Here are some things you can do if you need to pay off an existing debt that is unaffordable:
Refinance the Loan
If you are looking for a more affordable repayment option, you may want to consider refinancing your loan. With the debt refinancing process, you will need to take out a brand new loan to pay off the existing one. The goal here is to get a more manageable repayment plan.
Negotiate With Your Lender
Another thing to think about is negotiating with the financial institution. Both parties can talk to the lender and tell them about their financial situation. In most cases, lenders will be accommodating as long as it means some kind of repayment.
Get Side Income
Side income can help if it is hard to make monthly payments. You can pursue all kinds of side jobs, even temporarily, until the loan is paid back in full.
Things that a lender can do:
Use Collection Methods
If nothing can be worked out, your lender has the right to use a debt collector for repayment. The financial consequences can be highly dire when your loan account goes into collections. And so, for your own financial protection and health, it is best to communicate with your lender so they do not need to get to this point.
Repossess Assets
If an asset is involved with the loan, and the main borrower and cosigner cannot pay the loan, the lender has the right to repossess the assets. Loans like car loans, title loans, and mortgages all involve assets.
Your Credit Utilization Will Change
Your credit utilization ratio is the amount of debt you have versus the amount of available credit you have. If your credit utilization exceeds 30%, it can hurt your credit scores, while 30% and under can help improve them. Taking on the role of a cosigner will impact your credit utilization ratio, as the debt will show up on your credit report. And if that new loan raises your ratio over 30%, you could be harming your credit and financial situation.
Alternative to a Cosigned Loan
Borrowers with bad credit and low income may be able to look into alternative routes to get funding without a cosigner. Here are some options to consider:
- Bad Credit Loans — Bad credit loans are exactly that: loans for those with less than good credit history. These loans usually have high-interest rates because of the lender’s risk. However, even with the expense, they may get the job done if you only need a few hundred dollars and don’t have access to a cosigner. There are bad credit personal loans you can look into.
- Borrowing From Friends and Family — Borrowing from friends or family can be convenient because it usually means no interest and flexibility. However, it can also change the dynamics of a relationship.
- Using an Asset as Collateral — Adding an asset such as a car, jewelry, or property to a loan may improve your chances of loan approval.
What Is the Difference Between a Cosigner and a Co-Borrower?
There may be a time when a friend or family member may ask you to be a co-borrower instead of a cosigner. But what does co-borrowing vs. cosigning entail? When it comes to loan approval, just like a cosigner, a co-borrower can help another borrower qualify if they have bad credit. Along with that, just like cosigning, both people will have to go through the application process and okay a hard credit inquiry. This means that credit scores and credit history will be looked at and impacted with a co-borrowed loan.
A cosigner and co-borrower role share similarities, and they may sound the same, but they are pretty different. Unlike a cosigner, a co-borrower will also take on the same responsibilities that the main borrower is taking on right away, along with getting loan funds. Co-borrowed loans usually include auto loans and mortgages. In most cases, co-borrowers are family members who live in the same household and share finances. For example, a spouse or parent.
Here are some of the roles and responsibilities of a co-borrower:
Making Monthly Payments Along With the Other Borrower
If you are co-borrowing on a loan, you are also borrowing money from the lender. This means that both borrowers will have to repay the outstanding debt as soon as repayment starts, which will be stated on your loan contract. It is crucial for both borrowers to make on-time payments, as one missed payment from any borrower will impact both people’s credit scores.
Taking on Loan Repayment if the Initial Borrower Does Not
Like a cosigner, a co-borrower will be responsible for repaying the entirety of the loan if the other primary borrower does not or cannot. So, it is hugely important to consider whether or not you want to take out a loan with another person.
Conclusion With CreditNinja
In conclusion, at CreditNinja, we believe it’s vital for our clients to understand the distinctions and responsibilities associated with cosigning and co-borrowing. Cosigning means backing another’s loan to boost their approval likelihood, but it comes with its own set of challenges. Co-borrowers, on the other hand, take on loan responsibilities from the get-go. Knowledge is power, so always ensure you’re well-informed about these roles to safeguard your financial well-being with CreditNinja by your side.
