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Cosigning

What Credit Score Does a Cosigner Need?

In a perfect world, you would be able to get the loan you want or need on your own. Unfortunately, this is not always the case. You may have no credit or bad credit. Or, you may fail to meet the lender's minimum income requirements.

In these situations, you may ask a loved one to cosign so you can take out a personal loan, finance a car or get a credit card. Your cosigner will be responsible for the loan if you're unable to pay, and having one can make you more appealing as a borrower. So, what credit score does a cosigner need? Typically, a cosigner needs a good or excellent credit score, but requirements vary by lender.

How Does Cosigning Work?

When asking someone to be your cosigner, remember they are doing you a favor. Without them, you may not be able to land a loan with favorable terms. It's a nice gesture, but also a huge responsibility that comes with a major risk. Here's why: If you lose your financial footing, die or simply decide not to pay, your cosigner will be completely on the hook for repaying your loan.

Let's say you just graduated college and want to buy a car to commute to your first job. You have no credit and can't get approved for a car loan with desirable terms, so you ask your mother to cosign for you. If she cosigns, you're essentially borrowing her credit to secure your car loan. If your job doesn't work out and you can't make your car payments, your mother will be responsible for them.

If you believe you'll be able to repay your loan and feel comfortable asking a loved one to cosign, take these steps:

  • Explain why you need the loan. It's unlikely that someone will agree to cosign a loan if they don't know what it's for or how it will benefit you. Have a well-thought-out rationale and explain it to your potential cosigner.
  • Reveal why you need a cosigner. Let your potential cosigner know why you need their help. Be honest with them and inform them that you don't have the credit you need to obtain favorable financing.
  • Make their responsibility perfectly clear. Inform your potential cosigner that they'll have to repay your loan if you can't or don't make your payments for any reason. Be sure they are comfortable with this responsibility.

Who Qualifies as a Cosigner?

To be a cosigner, your friend or family member must meet certain requirements. Although there might not be a required credit score, a cosigner typically will need credit in the very good or exceptional range—670 or better. A credit score in that range generally qualifies someone to be a cosigner, but each lender will have its own requirement.

In addition to having a good or excellent credit score, your potential cosigner will need to show that they have enough income to pay back the loan in the event you default on it. If they lack sufficient income, they won't be able to offset the lender's risk and may not be able to cosign.

To determine whether a potential cosigner has enough income, the lender will likely calculate their debt-to-income ratio (DTI), which compares their total monthly debt payments with their earnings. It's a good idea to figure out your potential cosigner's DTI on your own before they apply to be your cosigner. To do so, add up all of their monthly bills, including the new loan payment they'd be liable for in the event you default, and divide that amount by their monthly pretax income. If their DTI is less than 50%, they should be good to go.

Does Cosigning Affect Your Credit?

When someone cosigns a loan for you, it ties the loan to their credit for its entire term. If you stop making loan payments and your cosigner is unable to take them over, you will both notice a drop in your credit scores. Additionally, the loan will factor into both of your DTIs, and that can hinder your ability to secure financing in the future.

If the debt is turned over to a collection agency due to non-payment, your cosigner will be included on call and mailing lists. In the worst-case scenario, the lender or debt collector may file a lawsuit against the cosigner if you can't repay your loan.

On the other hand, cosigning could help your loved one build their credit score. If you're a responsible borrower and make your payments on time, you both may see an improvement in your credit. Also, your loan will be added to your credit mix, which can help your credit scores as well.

The Bottom Line

While you may be tempted to ask a parent, sibling or significant other to cosign a loan, it's important to weigh the pros and cons of what you're asking them to do. If you don't feel confident that you'll be able to make timely payments, asking them to be a cosigner can be a risky move that can damage their finances as well as your relationship with them.

Remember that cosigning isn't typically a short-term commitment. Once they accept the responsibility, the cosigner is in it for the entire term of the loan. They won't have the option to back out or ask the lender to take their name off the loan, so if they're not completely comfortable with the responsibility, look for another cosigner.