Article originally published October 26th, 2016. Updated October 26th, 2018
If you don’t have stellar credit, you might’ve considered asking a friend or relative to cosign for you, be it for a personal loan, student loan or even credit card. Getting a cosigner can help you gain access to the credit you need while also helping you to establish and/or build your credit. However, there are several things you should know moving forward.
What Is a Cosigner?
In a nutshell, a cosigner is someone who guarantees that they will be legally responsible for paying back a debt if the borrower cannot pay. Some of the best people to consider reaching out to are a trusted friend or family member with a good credit history and a solid income history.
When Do I Need a Cosigner?
Getting a credit assist from a cosigner may be necessary to qualify for the credit you are looking for if you:
– don’t meet the minimum income requirements for a loan
– have no established credit
– have bad credit
– meet the minimum income requirements, but your debt-to-income ratiois too high
– are self-employed or
– changed jobs recently or your income is variable
How a Cosigner Helps
Getting a cosigner only helps, though, if you pay your cosigned loan as agreed. Doing so will help you to build a good payment history, which will also give your credit score a lift.
You can monitor your credit score as you pay off a cosigned loan by checking your free credit scores on Credit.com. You’ll never be asked for your credit card information, and, along with your scores, you’ll receive expert advice on improving your credit.
If you manage your cosigned loan payments responsibly, you can reap the benefits and watch your credit score climb over time.
How Does Cosigning Affect Credit Scores?
If you are the cosigner on a loan, then the debt you are signing for will appear on your credit file as well as the credit file of the primary borrower. It can help even a cosigner build a more positive credit history as long as the primary borrower is making all the payments on time as agreed upon.
However, you should also remember that as a cosigner, you are contractually obligated to make any late or missed payments. These late or missing payments can also significantly affect the cosigner’s credit and can lower their credit score.
As a cosigner, you should also note that by signing, you are also effectively opening a new line of credit on your credit report(s), so if you need to obtain a loan of your own, you may be considered a higher credit risk because you already have a loan you are responsible for.
What Is a Cosigner’s Responsibility?
A cosigner’s responsibility is to pay back the debt if the signer does not, plain and simple, and that can include late fees and collection fees. In some states, a creditor can attempt to collect the debt from the signer and cosigner simultaneously or, in some circumstances, attempt to collect first from the cosigner, including garnishing wages. State laws vary, so it’s good to check on what rules apply where you live.
It’s also good to keep in mind that, if the debt goes into default, it can become a blemish on the credit report(s) of both the signer and the cosigner. The lender must disclose all the cosigner’s responsibilities before that person agrees to the loan obligation.
Cosigners Need to Stay on Top of the Loan
You should never cosign on a loan and then go about your business like the loan doesn’t exist because the primary borrower should be paying it. By the time you realize anything is wrong, the account could have already made it to collections and may have done the damage to your credit already.
Always stay in close communication with the primary borrower and make sure you are alerted if they fail to pay, find that they cannot pay, or if something else is wrong. As a cosigner, you should always treat the loan as if it were your own.
Is a Cosigner for a Student Loan Treated Differently?
Just like with a personal loan, an auto loan, a mortgage or a credit card balance, your cosigner will be legally responsible for making the payments if you default on your student loans.
Private student loans are one of the hardest to escape as a cosigner. While the lenders may provide a cosigner release option, not all of them are exactly clear on the terms and conditions that may apply.
Sallie Mae, for example, is one of the largest private student loan lenders, and they have several conditions that must be met before they will consider a petition to have a cosigner released from all loan obligations; which brings us to the next point.
Can I Release My Cosigner From Their Responsibilities?
Yes. A release is typically an available option for cosigners, especially for student loans. Many creditors will allow the cosigner to be released from their obligations once a certain number of on-time payments have been made and a credit check finds the signer creditworthy to handle the loan or credit card on their own. Refinancing may also be an option for taking on sole responsibility for a loan.
Managing Your Risk as a Cosigner
Before cosigning any loan, it is important that you know who the borrower is and the risks that may be involved with this specific person. You will also want to carefully review your own budget, so you are prepared if the primary borrower fails to repay the loan.
Finally, make sure you receive copies of all the loan documents and other important information you may need including any login credentials so that you can view the account.
Be Responsible With Your Loan & Repayments
It’s very important to manage a cosigned account wisely. Pay your account as agreed each and every month. Remember, a cosigner is doing you a favor, and if you should fall behind on payments and the account becomes delinquent, the delinquency will show up on your cosigner’s credit report as well as your own — not to mention their legal liability to pay your debt.
So, take a close look at your finances before asking for a cosigner for help with a loan. Do you have the income to easily meet the loan payments each month and for the length of the loan? Assess your work situation. Do you expect to be working at the same job a year or two from now? How difficult will it be for you to get another job if you need one?
Remember your cosigner’s credit record is on the line as well as your own. So only apply for a loan with payments that you feel you can manage responsibly. Make paying a cosigned loan a priority in your budget.