A co-signer is someone who applies for a loan with another individual and who contractually agrees to pay off the debt if the other borrower doesn't make payments. The co-signer signs the loan application with the borrower and effectively guarantees the loan.
It can be hard to qualify for a loan without a strong credit score and a steady income, and some borrowers might have more success with the help of a co-signer when they're not able to get approved on their own.
What Is a Co-Signer?
A co-signer is someone who steps in when another individual, usually a friend or a family member, can't qualify for a loan on their own. This might be because they're young and haven't yet established a credit history, or because they've had financial difficulties in the past and their credit is less than stellar as a result.
A co-signer is something like a backup plan for the lender. They usually have above-average credit and a solid income. Lenders are more confident about approving a loan when two people are responsible for repaying it, and one of them, at least, is highly qualified as a borrower.
How a Loan With a Co-Signer Works
Lenders are more likely to offer favorable loan terms when a co-signer is involved, such as a lower interest rate, more flexible repayment terms, and lower fees.
The lender can pursue both you and your co-signer for the money if you default on the loan. You're each equally responsible for repaying the full amount borrowed.
Loan Requirements for Borrowers
Your history of borrowing is one of the most critical factors in getting approved for a loan. Lenders want to see that you’ve borrowed money in the past, and that you've repaid those loans on time. Likewise, they want to know if you're currently behind on payments toward any loans. They’ll certainly be reluctant to approve new debt if you're already in trouble financially.
Lenders also want to see that you have sufficient income to repay your loans, including any you might already have and the new loan you’re applying for. They calculate a debt-to-income ratio, which looks at how much of your monthly income currently goes toward all of your debt payments. The lower the percentage, the better, preferably no more than 43% in the case of qualifying for a mortgage.
Your debt-to-income ratio is your total monthly debt payments divided by your gross monthly income before taxes. It would be 25% if you earn $4,000 monthly and $1,000 of that income goes toward repaying debts.
Disadvantages for Co-Signers
Co-signers are responsible for loans even though they might not ever make a payment, so their own credit profile is affected. Future lenders will see on their credit reports that the individual has co-signed and could potentially have to pay off this loan, and this might make the difference between an approval and a rejection.
Co-signers should be reasonably sure that they personally won't have to borrow in the next few years, or that they have sufficient income and such superior credit that an additional loan on their credit report won't have much of an impact.
The co-signer's credit will suffer if they're unable or unwilling to repay the loan and the initial borrower defaults. It’s just as though they applied for and took out the loan themselves. The lender will report the missed payments to credit bureaus if the loan isn't paid, and the co-signer's previously strong credit will deteriorate.
This can be a problem if the borrower misses a few payments without the co-signer finding out about it. The co-signer might not ever have to pay anything, but those missed payments will affect their credit nonetheless and they might not know this until they apply for a new loan themselves.
Finding a Co-Signer
Start with friends, family, and anybody who will advocate for you if you need a co-signer. You need somebody who's interested in helping you and who knows you well enough to take the risk. Think of people who believe in you and understand how hard you’ll work to repay the loan.
The ideal co-signer is an experienced borrower with plenty of extra income to absorb your loan in a worst case scenario.
Family members might know you better than anybody, but they need to be on solid financial ground themselves. It won’t do you any good to ask somebody with bad credit (or no income) to co-sign. Strong credit improves your application, and sufficient income provides a safety buffer in case your life takes an unexpected turn.
Be candid when you ask for help. This isn’t the time to be shy about your finances. Consider sharing your income and job details because these factors will describe your ability to repay the loan on your own.
Make sure you have a firm understanding of how your loan works, including monthly payments, total interest costs, and other features. Would the lender be willing to release the co-signer after a certain number of on-time payments? Discuss these details with your prospective co-signer.
Don’t be surprised if nobody is willing to co-sign for you. It’s too risky for many people. They might not be comfortable putting their future or their family’s finances on the line, even though they want to help.
If You Can’t Find a Co-Signer
There might be other options if you need a co-signer but you’re coming up short. You might see your credit score improve after taking steps to build credit, but this will mean waiting a while to borrow. Get small loans, pay them off, and repeat. You can even improve your chances of getting approved with strategies like taking out a cash-secured loan.
You might be able to borrow against the value of an asset if you own something of value and if you pledge it as collateral for the loan. Lenders want security, whether it’s a co-signer or an asset that they can seize and sell to recover their money. Of course, this is risky because you'll lose the asset if you default on the loan.
Consider a smaller loan. You might get approved because smaller loans mean smaller payments that your income might be more able to support.
You might be able to open a secured credit card without a co-signer. Secured cards typically require a deposit, and they often come with a smaller credit limit, but using such a card wisely can build up your credit history and score.
Do I Need to Pay for a Co-Signer?
Several services and individuals offer co-signing services where you can pay for somebody to co-sign for you, but proceed with caution if you're considering using this option. You’ll pay a modest fee, and the co-signer will be responsible for repaying 100% of your loan if you default. If it sounds too good to be true, it probably is.
People who promise to co-sign might be con artists. Beware of anybody asking for your bank account number and similar details, or those demanding upfront payment with no way to ensure that they follow through on the deal. Ask yourself why this person would be willing to go out on such a limb for someone they don't even know, in exchange for that modest fee.
- A co-signer is someone who takes out a loan with another individual.
- Co-signers typically have better credit and stronger income than the initial borrower so their agreement to sign on the loan can help get the other get approved.
- Co-signers are equally responsible for paying off the debt.
- Negative and affirmative activity on the loan will appear on the co-signer’s credit report.