The Basics of Co-Signing a Loan

February 1, 2023

Successfully getting a loan for your financial needs can be a challenge sometimes. Suppose you went to the bank or a financial institution and they turned you down or asked you to cosign with someone who will be accountable for your loans. You will wonder what it entails. Let’s discuss what cosigning a loan means and why you should do it.

What is Co-signing a Loan?

Cosigning a loan entails signing a loan jointly with a borrower. The role of a cosigner is to take responsibility for the repayment of the loan unless the borrower fails to make the payment. A cosigner basically acts as a backup repayment source for the lender. This way the risk to the lender is significantly reduced and the chances of the primary borrower’s loan approval increase.

Most people seek a cosigner because they are not eligible for the loan on their own. It could be due to bad credit history, low income, or a lack of collateral. The addition of a cosigner also improves the odds of the primary borrower reaching an agreement for a lower interest rate.

Risks of Co-signing a Loan

Financial matters involve a lot of risks, and the same goes for cosigning a loan with someone. Consider these risks before you agree to go ahead with the process.

Debt Obligations

Cosigning a loan with someone does not mean that you are only lending them your trustworthiness or agreeing to be a witness. It implies that should the borrower fails to make the payment, the entire burden of their financial obligations will legally fall on you. Before cosigning, assess your own financial strength to determine if you are capable of taking on such a responsibility,

Credit History

When you agree to cosign a loan, the loan and payment history will be associated with both your and the borrower’s credit reports. In case there is a missed payment, or worse if the payment defaults, the impact would involve your own credit score and it may fall considerably. 

Credit Rejection

Another potential drawback of cosigning a loan is that once you sign the agreement, you may not be able to get credit if you need it because your debt levels would be too high and would make you a risky candidate for extending more credit to.

Getting Sued by the Lender

In case of failure to make the full payment on time or default, the lender can choose to take legal action against the borrower and since you are legally responsible for the borrower’s loan, they can also sue you for nonpayment. 

Benefits of Cosigning a Loan

The benefits of cosigning a loan for someone are obvious. When you act as a cosigner, you are helping someone secure a loan for their college tuition fees, or helping them pay off their mortgage, auto loans, or other personal needs. Moreover, if you want to improve your credit score it can be done through a borrower who pays the full payment at the right time.