38 percent of cosigners have to pay some or all of the loan or credit card bill because the initial borrower failed to pay, according to a creditcards.com survey.¹ Make sure you’re aware of the pros and cons before choosing to use a cosigner for a loan or credit card.
But what exactly is a cosigner? A cosigner is a person that signs onto a loan with the borrower and agrees to make payments if the initial borrower fails to do so. Being a cosigner makes you legally and financially responsible for the loan if the borrower can’t pay it. It can be a risky situation that damages your credit and your relationship with the borrower if they can’t pay off the loan.
Cosigners are often used for things like student loans, auto loans, mortgages, credit cards and sometimes even installment loans. It’s essentially an added layer of protection for the lender. This way, they know that they’re more likely to be repaid even if the borrower fails to make payments. Oftentimes a cosigner is a very close friend or relative of the borrower who has good or excellent credit.
Just like with any financial product or practice, there are pros and cons to using a cosigner. The pros are that you may qualify for a loan that you wouldn’t have otherwise. If you have a low credit score or poor borrowing history you may not be approved for certain types of credit or loans. Using a cosigner is a way to gain access to these products and improve your credit so you can qualify in the future.
That being said, there are several risks associated with using a cosigner as well. As we mentioned, this could potentially damage your relationship with the cosigner. If you don’t make payments and they’re forced to pay your loan for you, odds are they won’t be happy about it. This will also damage your credit since you failed to make payments on a loan you’re responsible for. Make sure to explore all of your options before choosing to use a cosigner.