In this article, we’re answering “what is a cosigner?”
This will include examples of specific situations when requiring a cosigner is normal. We will also answer common questions about cosigners.
This article is part of our free series on banking basics, ranging from how to open accounts to higher interest rates, which you can access by clicking here right now.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Is a Cosigner?
- Who Qualifies as a Cosigner?
- Reasons You May Need a Cosigner
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
What Is a Cosigner?
A cosigner is what many people call a guarantor or financial backer. In short, if a borrower is unable or unwilling to meet their financial obligations, the cosigner is responsible to continue meeting the financial obligations on their behalf. For this reason, most cosigners are related parties, including family and friends. However, in certain instances, business associates may also be cosigners.
Who Qualifies as a Cosigner?
Who qualifies as a cosigner will ultimately depend on the bank or financial institution that is issuing the loan. However, in most cases, a cosigner will include a family member, friend, or another individual that is qualified as a borrower and willing to assist the borrowing party with securing their financial requirements.
Can a Co-Signer Get Out of a Loan?
Yes, a co-signer can get out of a loan. However, in order to get out of a loan as a co-signer, you will typically need to complete a specific process with the financial institution. This will include being released by the financial institution and transferring full responsibility for the outstanding debt to the borrower. That said, if the borrower is incapable of taking on the loan on their own, it may not be possible to get out of a loan.
Can Being a Co-Signer Hurt Your Credit?
Yes, being a co-signer can hurt your credit if the person you are cosigning for does not meet their financial obligations. Likewise it is possible that co-signing can impact your ability to get future financing as it increases your debt-to-income ratio, which can impact your eligibility for a loan or mortgage.
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Reasons You May Need a Cosigner
The reasons you may need a cosigner are unique to each individual case. However, some of the most common reasons include a limited credit history, poor credit score, limited income, desire for better interest rates and terms. Here is a closer look at some of the reasons you may need a cosigned in common financial scenarios.
Student Loans
Student loans for professional degrees commonly need a cosigner if the individual requiring the loan does not generate enough income to obtain the financing on their own. This is especially true in a situation where the individual is not pursuing a professional degree in medicine, law, or another “professional” field.
Auto Loans
Auto loans are another common time that cosigners are required. However, unlike student loans, auto loan cosigning is typically needed when someone is buying their first car and does not have sufficient credit history or has a low credit score and cannot get approved for the loan on their own.
Personal Loans
Personal loans are another example of financing that can require cosigning. In this example, there are a wide range of reasons that can result in someone needing a cosigner. This can include not being able to service the amount of debt on their own, not having sufficient credit history, or having poor credit history as explained in the examples above. However, it can also include a desire for better financing terms or rates due to the stronger credit rating of the cosigning party.
Frequently Asked Questions
Below are two of the most common questions that we receive from people looking into what a cosigner is. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
Will Cosigning Hurt My Credit?
Yes, cosigning can hurt your credit score if the person you are cosigning for misses a payment. On the other hand, even if the other party does not miss a payment, cosigning can impact your ability to access future financing as the loan balance will show up on your total debt-to-income ratio, which is how financial institutions assess a person’s ability to meet their financial obligations.
What Is the Disadvantage of Being a Cosigner?
The disadvantages of being a cosigner include being financially liable for another person’s commitments. In other words, if the person that requires the cosigner decides (or is unable) to meet their financial obligations, then the cosigning party will need to cover these financial obligations for them.
Can a Co-Signer Become the Primary Borrower?
No, a co-signer cannot become the primary borrower because they do not have any legal ownership rights. Instead, the cosigner is liable for the obligation of payment but they are not entitled to any further rights or benefits over an asset.
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