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A cosigner is someone, usually with good credit and income, who agrees to take responsibility for a loan if the primary borrower fails to repay. Adding a cosigner to a loan application can improve your approval odds, especially if you have limited income or lower credit scores.
On the other side of the coin, a close friend or relative may ask you to cosign for a loan if your credit is strong. While it may be tempting to help a loved one obtain a loan to, say, consolidate debt or purchase a car, understand that cosigning a loan can be risky. Here's what you need to know about what cosigners do and the potential benefits and risks of cosigning.
What Is a Cosigner?
A cosigner is someone who agrees to take responsibility for repaying another person's loan if that person stops making payments. When a borrower adds a cosigner to an application, the lender reviews the cosigner's credit and income as part of the approval process.
Adding a cosigner can be a good option when the primary borrower has poor or limited credit or a high debt-to-income ratio (DTI). A cosigner who is stronger in those areas may help the borrower qualify for a loan they might not be able to obtain on their own.
Why Would a Loan Need a Cosigner?
You may want to enlist a cosigner if you'd have trouble qualifying on your own. Here are some common reasons you might need a cosigner:
- Limited or no credit history: Lenders review your credit history to help gauge how likely you are to repay a loan. If you're new to using credit, your lender may want a cosigner with established credit on the loan to reduce their risk.
- Low credit scores: Lenders often see low credit scores as a warning sign and may be less willing to approve a loan. A cosigner with strong credit can help improve your chances of approval.
- Insufficient income: If your income is too low or too inconsistent to comfortably cover the monthly payments, the lender may require a cosigner with a higher income.
- High DTI: A borrower's DTI helps lenders evaluate how much room a person has in their budget for a new monthly payment. If that ratio is higher than the lender's maximum DTI requirement, a cosigner with stronger finances may help them meet the lender's requirements.
- Better loan terms: Even a borrower who qualifies for a loan on their own might want to add a cosigner to secure a lower interest rate or a larger loan amount.
Learn more: How to Build Credit: A Comprehensive Guide
Requirements to Be a Cosigner
Cosigner requirements vary from one lender to another, but here's what you must look for:
- Good credit scores: Cosigners generally need good to excellent credit (670 FICO® Score☉ Θ or higher), though requirements can vary based on the loan type. For example, conventional mortgages typically require a minimum FICO® Score of 620.
- Steady income and employment: Lenders want to see that the cosigner has reliable income and a stable job history. They may ask for pay stubs, W-2s, tax returns or other documents to verify income.
- Low DTI: Lenders weigh a cosigner's total monthly debt payments against their gross monthly income, including the payment they'd take on if the main borrower stopped paying. Most want that DTI below 50%, but it may need to be below 43% for a mortgage.
- Proof of citizenship or residency. Cosigners typically must be U.S. citizens or permanent residents and be able to show proof, such as a government ID, Social Security number or a green card.
Learn more: What Credit Score Does a Cosigner Need?
Guarantor vs. Cosigner vs. Co-Borrower
When you apply for a loan and don't quite qualify on your own, you may come across the terms cosigner, co-borrower and guarantor. While each can help a borrower get approved, they are distinctly different.
A cosigner backs the loan and covers any payment the borrower misses, but doesn't share the money or own the asset the loan funds. By contrast, a co-borrower shares the loan equally, including the funds and the asset. For their part, a guarantor backs the loan without becoming a co-applicant and steps in only if the main borrower can no longer make the payments.
| Guarantor | Cosigner | Co-Borrower | |
|---|---|---|---|
| Liability | Owes the balance only after the borrower defaults | Owes each missed payment, and the full balance if the borrower defaults | Shares full responsibility from day one |
| Access to funds | No | No | Yes |
| Asset rights | No | No | Yes |
| Credit impact | Only if the borrower defaults | Affects both borrowers' credit | Affects both borrowers' credit |
Advantages of Cosigning
Cosigning for a loan offers a few valuable benefits.
The Borrower's Approval Odds May Increase
When you cosign on a loan, the borrower receives the biggest benefit. Your good credit and steady income can often offset the lender's risk of lending to a primary borrower with weaker qualifications. The added support can improve the borrower's chances of approval and may help them qualify for better terms or a larger loan.
Learn more: Being a Cosigner Can Help Build Your Credit
Your Credit History Could Improve
When you cosign on a loan, it will appear on both your credit report and that of the primary borrower. As long as the loan's payments are made on time each month, it should be noted on your credit report as paid as agreed. That may help improve your credit help since payment history is the most important factor in your FICO® Score, accounting for 35% of your score.
Of course, your score could also be harmed if payments are late or missed, so only consider cosigning for someone you believe is responsible and reliable enough to make timely payments.
You Can Help a Friend or Relative in Need
One of the main advantages of cosigning is helping a loved one reach an important financial goal, such as buying a car or qualifying for a home loan. Your good credit could also help someone with less-than-ideal credit qualify for a better interest rate and save them thousands of dollars in interest. Even better, you can help the primary borrower learn to manage credit responsibly while building a credit history that could prepare them to qualify for credit on their own in the future.
Disadvantages of Cosigning
Before cosigning on a loan, make sure you understand the potential drawbacks it comes with.
Your Credit Could Be at Risk
As a cosigner, any late or missed payments by the borrower could hurt your credit scores. Even worse, if the borrower defaults on the loan, the debt may go to collections, which could appear as a derogatory item on your credit report for up to seven years.
You're Legally Responsible for the Debt
If the primary borrower falls behind on the payments or defaults, you may be financially responsible for making the payments. That could put sudden pressure on your budget. If the debt is sent to a collection agency, a collector could come after you to recover the loss. In that case, you'd be responsible for the debt and any late fees or debt collection costs.
In some states, the lender can come after you first, before the borrower, which means they could sue you or garnish your wages to collect, according to the Federal Trade Commission.
You May Find Removing Yourself as a Cosigner Challenging
Getting a lender to remove you as a cosigner isn't easy, primarily because the lender has little incentive to do so. To the lender, the cosigner represents an insurance policy on the debt. But it can happen if the lender decides 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.
Alternatives to Cosigning
If you're not keen on cosigning, explore other alternatives to cosigning you may be more comfortable with, such as:
- Lend money from your savings. If you have enough in your savings account, you may prefer lending the money rather than cosigning a loan. Of course, you risk losing the money if the other person doesn't repay you, so only lend to someone you trust. Establishing expectations from the beginning with a written agreement may help reduce strain on the relationship. Consider outlining repayment terms and what happens if the borrower doesn't repay the loan.
- Add the borrower as an authorized credit card user. Adding someone to your credit card as an authorized user can help them build credit without requiring you to cosign a loan. In many cases, your account history will appear on their credit report. Just remember, they'll have access to the card, so it's important to set clear spending rules upfront.
- Help the borrower improve their credit and income. Teaching a loved one how to build credit may help them qualify for loans on their own without needing a cosigner. Encourage them to take steps to improve their credit, and to lower their DTI by paying down debt or increasing their income through extra hours or a side hustle.
If you are a borrower and don't want to ask someone to cosign a loan (or were turned down), consider one of these alternatives:
- Try a different lender. Since underwriting standards vary, you may qualify with one lender even if another turns you down. Before applying, ask the lender for minimum credit requirements and other qualification criteria. For mortgages, government-backed loans often have more lenient credit requirements than conventional loans.
- Consider a secured loan instead. A secured loan may reduce a lender's risk in much the same way a cosigner would. You would put up collateral such as a savings account or vehicle. Alternatively, you could see if a loved one might offer savings account funds or another asset to secure a loan if they're comfortable with the risk. These options may help you qualify for the loan without affecting the other person's credit.
- Apply for a secured credit card. If your goal is to build credit, a secured credit card may be a better option than asking someone to cosign. Secured cards are commonly used as credit cards for building credit because they require a refundable security deposit that typically serves as the card's credit limit. By making on-time payments, the borrower can build a positive credit history without involving a cosigner.
Frequently Asked Questions
Is a Guarantor the Same as a Cosigner?
Although both a guarantor and a cosigner take responsibility for helping ensure a loan or lease is repaid, they are not the same. A cosigner is responsible for the debt from the start, while a guarantor is only responsible if the borrower defaults. Neither has ownership rights to the funds or the asset being financed. A loan may also appear on a cosigner's credit report as an active debt, while it may only show on a guarantor's credit report if the borrower defaults and the guarantor is required to repay it.
Does the Cosigner Get the Money?
No, the cosigner doesn't receive the loan funds or have any ownership rights to the property or asset the loan finances. The cosigner adds their credit profile to the application to help secure approval, but the loan proceeds and any assets purchased with the loan, such as a car or home, belong to the primary borrower.
Can You Apply for a Loan With a Cosigner Online?
Yes, many lenders let you and your cosigner apply online, including traditional banks, credit unions and online lenders. Your cosigner will need to provide their information and sign the documents the lender requires, which can often be completed electronically.
The Bottom Line
While a cosigner can help a borrower get approved for a loan, it can also strain the relationship. After all, cosigning can put a person's credit and finances at risk if the borrower doesn't pay as agreed. With so much on the line, you might consider cosigning only for a close friend or family member you trust to keep up with the payments.
If you're looking for a loan, it's a good idea to see what you qualify for on your own first. Experian's free loan comparison platform matches you with personal loan offers based on your credit profile, so you can compare rates and terms side by side. Because prequalifying uses a soft inquiry, checking your options won't affect your credit scores. Some offers even come with No Ding Decline™⊛, a feature that lets you apply without a hard inquiry if you're not initially approved.
⊛Applying for loans labeled No Ding Decline™ won't hurt your credit scores if you aren't initially approved. Initial approval and/or acceptance of this loan may result in a hard inquiry, even if you're unable to pass final verifications, which may impact your credit scores.