A cosigner is a person who applies for a credit product with someone who may not qualify on their own, and takes equal responsibility for the account. By getting a cosigner, you can strengthen your application and reassure the lender the loan will be repaid if you default. If you're offering to cosign a credit card or loan for a family member or friend, you're promising to make those payments if the other borrower doesn't follow through.
Are you considering a cosigner to get a credit product or cosigning a credit product for someone else? Keep reading to learn about what cosigners do and the pros and cons of signing your name on the dotted line.
What Does a Cosigner Do?
A cosigner can help you qualify for a credit card, mortgage or other loan when you can't do so on your own. Cosigners share equal responsibility for the debt and agree to cover any loan or credit card payments and applicable fees if the primary borrower fails to pay. The debt account will appear on the cosigner's credit report, and depending on how the primary borrower manages the account, could help or hurt the cosigner's credit score.
Although the cosigner is legally obligated to make payments if the borrower can't, they have no rights to the loan proceeds.
Pros and Cons of Cosigning
If you can find a cosigner with a strong credit profile, you may be more likely to get approved for the credit card or loan you need. However, there are potential risks to consider—whether you're the cosigner or the borrower considering asking someone to cosign with you.
- Your approval odds may increase. If you have bad or even fair credit, applying with a cosigner could help you qualify for an unsecured credit card; you're also more likely to be approved for a loan or mortgage with more favorable terms and a lower interest rate.
- You can help a friend or relative in need. Cosigning for someone with bad credit could help them get approved and save hundreds or thousands of dollars in interest. Even better, you can play a part in helping the primary borrower learn to manage credit responsibly.
- You risk damaging your credit. As a cosigner, your credit could take a hit if the borrower pays late or misses payments and the lender reports the delinquency to the credit bureaus. This can cause your credit score to plummet and could result in a strained relationship with your cosigner.
- You assume liability for the entire credit card balance or loan amount. You will be on the hook for missed payments as a cosigner if the primary borrower falls behind on their debt payments. If they open the account and fail to make a single payment, you will be responsible for repaying the entire debt. If you're unable to pay, you could get sued by the creditor to recoup the funds owed.
- It's challenging to remove yourself as a cosigner. If you want to take yourself off the loan or card account, it's up to the lender to decide if the primary borrower can make payments on their own. The only other way to remove yourself as a cosigner is for the primary borrower to refinance or pay off the loan. If it's a mortgage loan, you could get released once the borrower sells the property and the loan is paid in full. For other loans, read the fine print to determine the terms under which you can be released as a cosigner.
- You may get turned down if you apply for other credit products in the future. If you cosign a loan and then need to apply for credit for yourself, the lender may deny you because your current debt levels are too high. This is especially the case if your debt-to-income ratio is high and you're seeking a mortgage.
How to Find a Cosigner
If you need a cosigner, start by asking family and friends who are financially stable, have a steady source of income and have good or excellent credit for help. Explain to the person you're asking how the debt product will benefit you, why you need a cosigner and their role in the transaction. Being honest and upfront about their responsibility for the loan is crucial to maintaining a strong relationship once the documents are signed. If you are the person being asked to cosign a loan or credit card, think very carefully about doing so and consider all the pros and cons first.
No luck getting a cosigner? You may need to improve your credit before applying for a loan or card. You can get your Experian credit report and credit score for free to know where you stand and what to focus on to boost your credit health. When you register, you'll also get real-time alerts of any activity on your credit reports and free insights on factors that are impacting your credit score.