How Co-Signing Works as a Borrower or Signer
What is Co-Signing?
Co-signing happens when somebody promises to pay a loan for somebody else. This happens when a bank won't approve a loan (or it won't approve the original application, but it's wiling to lend if a co-signer is involved).
Borrowers generally need good credit and enough income to qualify for a loan. If they can't qualify on their own, they can use a co-signer's credit and income to help.
When somebody co-signs, they are included in the application and the lending decision -- they boost the appeal of the borrower.
The act of co-signing is just what it sounds like: the co-signer signs an agreement and becomes responsible for the loan.
What Should I Know When Finding a Co-Signer?
Finding a co-signer can be difficult. For starters, you need to find somebody with good credit, and with enough income to support your loan (not to mention any other loans they may have on their own). That typically means somebody who has a long borrowing history and who earns as much or more than you do.
Next, you need to find somebody who's willing to co-sign. This person will take 100% responsibility for the loan if you fail to pay it for whatever reason. That's a huge responsibility -- if you die in an accident, lose your job, or decide not to pay, the co-signer is left with your debt. If they don't pay it, their credit will suffer, so asking somebody to co-sign for you is asking a huge favor.
For more details, see Finding and Using a Co-Signer.
If it turns out that you can't find anybody to co-sign your loan, or you prefer not to use a co-signer, there still may be ways to borrow. For a few ideas, read Get a Loan Without a Cosigner.
Remember that this won't last forever: over time, you'll build credit and you'll be able to borrow on your own.
What Should I Know Before Co-Signing a Loan?
Co-signing a loan for somebody is risky. As stated above, you take full responsibility for the loan -- even though you're not getting the money. If the borrower can't or won't repay, the burden will fall to you.
Co-signing can be risky even if the primary borrower repays the loan: when you co-sign, other lenders can see that you'll potentially have to repay the debt -- so they may be more hesitant to lend to you individually. That means qualifying for a home or an auto loan will be more difficult, even though you're not making any payments on the loan you co-signed.
Co-signing a loan is a generous act: you'll give somebody a hand, often without spending a dime of your own money. But it's risky. Remember, the bank is in the business of lending, and they're not willing to hand money over to the borrower -- so you need a good reason to take the risk. To see more details (as well as alternative ways to help without putting your credit on the line), read Before You Co-Sign a Loan.