What Is a Cosigner? How They Help With Loans and Credit

When you apply for a loan or credit card, the lender considers various aspects of your finances to ensure you're a reliable borrower. Unfortunately, a bad credit score, lack of credit, or low income can prevent you from getting approved. However, you might have the option of applying with a cosigner to improve your chances.

Applying with a cosigner can be extremely advantageous for you as a borrower, but it also comes with risks, especially for the cosigner. That's why it's important to weigh both the benefits and the potential risks before deciding if cosigning is the right move for you.

What is a cosigner?

A cosigner is someone who agrees to take on responsibility for someone else's debt. When you apply for a loan with a cosigner, the cosigner promises the lender that if the primary borrower can't make the payments, they'll step in to meet that obligation.

“This assurance can be crucial in getting the loan approved or securing better terms,” says Steven Glick, a licensed mortgage loan officer and director of mortgage sales at HomeAbroad.

A cosigner is usually required if you don't have enough credit history or a high enough score to qualify for a loan on your own. For example, if a lender requires a credit score of 670 to qualify, but yours is only 600, you may only qualify if you apply with a cosigner who meets the credit requirement.

Glick notes that a cosigner can also help you qualify for a better interest rate, especially if they have stronger credit than you. Since rates are largely based on a borrower's financial profile, their credit can work in your favor.

See Also: Co-applicant vs. Cosigner: What's the Difference?

How does cosigning a loan work?

You can use a cosigner for many different types of loans, including auto loans, personal loans, private student loans, and even mortgages. Some credit cards may also allow cosigners, but it's less common.

When someone cosigns a loan, they agree to take full legal responsibility for the loan alongside the main borrower. If the borrower doesn't pay, the lender can require the cosigner to pay instead. Both the borrower and the cosigner are equally on the hook.

Because of this, “the loan is added to the cosigner's credit report and affects their score just as if they were the primary borrower,” says Christine Peters-Staggs, financial consultant and owner of Cornerstone Financial Coaching.

“The impact on their credit will greatly depend on the composition of their outstanding credit lines and other borrowings at the time they decide to become a cosigner,” she adds.

For example, if the cosigner already has several loans, adding another could hurt their score. But in some cases, cosigning can help. It might improve the cosigner's credit mix if they don't already have that type of loan or even boost their score if the borrower makes every payment on time.

Pros and cons of having a cosigner

Before asking someone to cosign your loan, consider the pros and cons for both the primary borrower and the cosigner.

Pros and cons for the primary borrower

“From the borrower's perspective, there's no downside to having someone with better credit cosign a loan,” says Peters-Staggs.

A cosigner can help you get approved if your credit or income isn't strong enough on its own. Even if you could qualify by yourself, applying with a cosigner who has good credit could help you lock in better terms, like a lower interest rate, a smaller down payment, or a higher loan amount.

However, if you fall behind on payments, both your and your cosigner's credit could take a hit. That can strain your relationship, especially if they didn't expect to be on the hook for the loan. Some lenders may also limit your options to remove a cosigner later, so the responsibility could stick with them for the life of the loan unless you refinance or qualify for cosigner release.

Pros and cons for the cosigner

Cosigning a loan doesn't offer much financial benefit. In some cases, it might slightly boost your credit score, especially if the loan adds variety to your credit history or the borrower makes every payment on time. But if you already have good credit (which is likely, since you were asked to cosign), that boost may be small.

Other than a possible slight boost to your credit, the key benefit of cosigning someone else's loan is helping a loved one qualify for a loan or credit card.

Unfortunately, the negative effects of cosigning a loan can be extreme. Even if the borrower makes every payment on time, cosigning can still affect your credit. The loan will show up as a new account on your credit report, which could slightly lower your score. It also affects your debt-to-income ratio (DTI), which can make it harder to qualify for a loan of your own later on, such as a mortgage or car loan.

If the borrower falls behind on payments, the risks become even greater.

“In the worst-case scenario, if the borrower does not repay the loan, the cosigner will be subject to collections and legal proceedings and could end up paying off the loan themselves to save their credit,” says Peters-Staggs.

When is it a good idea to use a cosigner?

Using a cosigner can make sense if you don't qualify for a loan on your own, either because your credit is limited or poor or your income is too low. Even if you do qualify, adding a cosigner with strong credit can help you get better terms, like a lower interest rate or a smaller down payment.

“Sometimes, you might qualify for a loan on your own, but the terms aren't great — think high interest rates or a large down payment requirement,” says Glick. “A cosigner with strong credit and steady income can help you secure better terms.”

Of course, a cosigner isn't always the right solution. If you're struggling to get approved or only qualify for high rates, it may be better to take a step back and work on building your credit before applying again.

You could also consider a secured loan, which allows you to borrow money if you provide collateral, such as a physical asset or deposit account.

How to remove a cosigner from a loan

In some cases, you may be able to remove a cosigner from your loan, which releases their responsibility for repayment. There are two main ways to do this:

• Apply for cosigner release: Some lenders let you apply to release your cosigner from the loan after you've made a set number of on-time payments. However, you'll typically need to show that your credit and income are strong enough to qualify on your own. Not all lenders offer cosigner release. So if it's important to you and your cosigner, look for one that does before you take out the loan.
• Refinance the loan: Another way to remove a cosigner is by refinancing the loan in your name only. This replaces your original loan with a new one. But to qualify, you'll need to meet the lender's credit and income requirements, just like when you applied the first time. Refinancing may also come with fees, such as an origination fee, depending on the lender.