The term “cosigner’ may be new to you, since it only comes up in certain situations. The most common is when an individual can’t qualify for an installment loan on their own.
If you’ve been told that you need a cosigner it is important that you understand what a cosigner is, why you might need one, and what one can do for you. If you’re considering being a cosigner, you also need to understand everything that cosigning involves.
Why Might You Need a Cosigner?
It can come as a bit of shock when a lender tells you that you need a cosigner when you thought your application would go through easily. Nonetheless, you shouldn’t take it personally.
Every lender uses their own criteria to decide whether or not they think you can comfortably pay back a loan. If they think you either can’t manage the payments on your own or you’re more of a risk than they might like to see, they may want more assurance.
What Do Lenders Consider When You Apply for a Personal Loan?
Every lender uses their own set of criteria to determine whether or not they’ll lend you money. This means that you could be turned down by one and approved by another.
Nonetheless, most lenders do consider common points when judging your creditworthiness. These may include your:
- Credit scores
- Length and quality of credit history
- Income amount and source
- Financial and life stability
- Existing debt
Of course, there can be many other things lenders consider, since they each have their own set of requirements.
Still, if you find that you are constantly turned down for a personal loan when you apply on your own no matter the lender, it could be because you’re weak in one or more of the areas mentioned.
Always do what you can to improve your situation before you ask someone to cosign for you. You may be able to attain a good credit score range or find another loan option to qualify without a cosigner. This is often possible even if you earn your money through an alternative income source.
What is a Cosigner?
Basically a cosigner is a person that agrees to jointly take on the responsibility of a loan with you. Their credit worthiness offers the extra assurance lenders need to issue you a loan. Their credit history and income strengthens your installment loan application. Fortunately, many people get loans with cosigners.
Are There Advantages to Getting a Personal Loan With Cosigner?
Yes, there can be several. Of course, most people would prefer to get a personal loan themselves, but when they can’t a cosigner can help.
The first and most obvious advantage is that you qualify for loans with cosigners more easily than on your own.
The second advantage is that you may get your loan at a lower interest rate based on your cosigners stronger credit. That makes your loan more affordable.
Finally, getting a loan can help you build your credit, providing you make timely payments. Your payment history accounts for 35% of your credit score and the length of your credit history makes up a further 15%. Taking out a personal loan can also diversify your credit mix, which accounts for another 10% of your credit scores.
Who Can Be a Cosigner?
Pretty much anyone of legal age in your state that has decent credit, a steady income, and a low debt-to-income ratio can cosign for a personal loan, providing they are willing to do so.
Even if a person can cosign, it doesn’t mean they will. In many cases, it isn’t a reflection on you, but a more pragmatic one.
Does Being a Cosigner Affect Your Credit?
Becoming a cosigner is a risk. If you miss payments, the cosigner must make them. Even more troubling, failure to repay a loan according to the terms could damage both your credit and the cosigner’s too.
Installment loans are also a long-term commitment some people don’t want to get into. Moreover, co-signing a loan increases the cosigner’s debt-to-income ratio making less credit available to them.
How Does a Cosigner Work?
Cosigners are usually people you know well like your parents, siblings, good friends, or partners. They are people with decent credit, a steady income, and a low debt-to-income ratio. Plus, they must be willing to assume the risks mentioned above.
What does a cosigner do? Basically, they support you with their credit and income so you can build your own credit. They sign your loan documents and become responsible if you don’t pay payments. If you manage your loan well, it can boost the cosigner’s credit too, even though they probably don’t need this perk.
When considering a cosigner, weigh the resilience of the relationship between the two parties. When anyone cosigns for an installment loan, the commitment remains even if the relationship crumbles. As an example, you might co-sign for a partner’s loan, but later break up. Even if you aren’t together, you’re still on the hook for their loan if they don’t pay.
Furthermore, when a person does not pay their loan it can destroy strong relationships. As an example, many a parent/child relationship has suffered when an irresponsible child leaves a parent to pay their payments.
Do All Lenders Allow Cosigners?
No, not all lenders allow cosigners, but many do. If you’re turned down by one lender you may get approval through another that does allow cosigners.
Furthermore, lenders can’t force your partner or spouse to cosign just because they would like extra assurance. If you can qualify for a personal loan on your own there’s no need for them to cosign.
Should You Cosign for a Loan?
Even if you know and care about a person, that doesn’t mean you should put your finances on the line for them. Cosigners do not have access to loan money or the asset it is sometimes attached to, such as a vehicle. Yet, they are risking their own credit.
It’s always a good idea to lay out rules and expectations before you sign loan documents. Discuss how you will check the borrower is sticking to their repayment plan. Also figure out what will happen if the borrower can’t make their payments so that both parties retain their credit. In the end, it is entirely up to you whether you want to co-sign.
Guarantor vs Cosigner
A guarantor is another term often used to describe someone who helps you get a loan. However, a guarantor and a cosigner are not the same, because they are responsible for the borrower’s debt in different ways. A cosigner is responsible for missed payments, but a guarantor takes responsibility when the entire loan if the borrower goes into total default.
How Can Someone Cosign for a Loan?
At one time the only way to borrow was in-person. Luckily, that is no longer the case. Many of today’s lender operate online and they may ask for document uploads to confirm identities and income. Some lenders use digital income verification to simplify the process.
If you and your cosigner are approved for a loan, the lender may send you documents to e-sign. This eliminates office visits and speeds the loan process. Once the borrower and cosigner sign the papers, it is a legally binding contract. The terms of the loan come into effect and payments start.
Can a Cosigner Be Taken Off a Loan?
It depends. Some personal loans allow you to remove the cosigner after making a certain number of payments or when the loan balance drops below a specified amount. Check before you sign your loan contract if this is a concern of yours.
If your financial position improves, you may also be able to obtain a new loan to pay off your cosigned loan.
Of course, the simplest way to remove a cosigner is to pay off your loan. Once it is closed, the contract is void and cosign obligations no longer exist. Most of the time this is accomplished through regular payments. However, this can also happen if the loan is backed by an asset such as car. If you sell it and it’s worth more than the loan, you can pay off the loan and remove the cosigner in the process.
What If You Can’t Get a Cosigner?
Basically, you have two things you can try to get a loan.
First, focus on your income, credit scores, and debt to improve your odds of approval. If you can bolster your credit scores, earn more money, or pay down some debt you may qualify. Sometimes all it takes is a debt consolidation loan to lower your payments.
Second, you can apply through multiple lenders to find one that is more lenient. You can do this through a loan broker. You complete one application form, they do the searching for you, and the process does not lower your credit scores.
Finally, you can change the amount you are trying to borrow, stretch out the repayment time, or find a loan with a lower interest rate. Changing these factors may help you qualify.
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