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LEGAL DICTIONARY

Cosigner

What Is a Cosigner?

A cosigner is an individual who applies for a loan with someone else –often a close friend or family member– and who agrees to pay off the debt if the other person cannot make payments.

Many lenders are hesitant to approve a loan for someone with no credit history or a poor credit score. A cosigner with a steady income and a high credit score effectively guarantees the loan for the creditor. Student loans, home improvement loans, personal loans, credit card agreements, mortgages, and automobile loans are standard loan agreements that use cosigners.

What Does a Cosigner Do?

When someone cosigns a loan, they agree to take full legal responsibility for the loan if the other signer does not make payments. A lender might ask for a cosigner if a borrower meets some or all of the following:

  • little to no credit history
  • negative information in their credit report
  • employment record is brief or unstable
  • debt-to-income (DTI) ratio is high

Having a second person sign the loan agreement makes the loan less risky from the lender's perspective. Although the cosigner’s credit history and income history do not need to be perfect, their financial history should demonstrate stability and responsibility.

Both the borrower and the cosigner will be subject to a credit check and will need to provide the following information to the lender:

  • driver’s license
  • proof of income (such as pay stubs)
  • verification of address (such as utility bills and photo IDs)
  • Social Security number

A cosigner and a guarantor have similar responsibilities. However, there is one key difference between guarantor vs cosigner. In the case of an apartment lease agreement, for example, a cosigner has the immediate responsibility of paying rent –just as the tenant does. On the other hand, a guarantor is responsible for paying rent only when the tenant fails to do so.

What Is a Cosigner for a Car?

One of the most common loans that require a cosigner is an automobile loan. A parent might cosign a car loan for their child whose lack of credit history makes it challenging to obtain a loan.

Cosigning a loan agreement for a car means your name is on the auto loan application. However, the cosigner’s name is not on the title, and the cosigner has no rights to the vehicle.

Serving as a cosigner is a different legal arrangement than a co-borrower since the latter shares equal rights with another loan applicant. In the case of a car loan, co-borrowers would have equal ownership of the vehicle, and both names would appear on the title.

Cosigners also have the right to view monthly loan statements and late notices, but they may need to obtain a written agreement from the lender before gaining access to the documents. Other cosigner rights vary depending on state laws.

How to Find a Cosigner

Family members and close friends who trust you and believe in your ability to repay the loan are the people who are most likely to serve as a cosigner.

Cosigners should be on a solid financial footing with enough income to pay off the loan if you cannot. When asking someone to cosign your loan, it is essential to be candid about your finances and to describe in detail how you will repay the loan.

Be ready to explain your loan details with your prospective cosigner, including monthly payments, interest costs, and any other pertinent features.

How to Remove a Cosigner

In some cases, a lender may be willing to remove a cosigner from the loan agreement after a specified period of time. For example, the lender may require two years of on-time payments in order to remove a cosigner.

This scenario –called a cosigner release option– should be discussed in advance of signing the loan. Keep in mind that some lenders will not agree to this option since it puts them at greater risk. Regardless, the best way to remove a cosigner is by paying off the loan.

Cosigner advantages and disadvantages

Here are some advantages and disadvantages of having a cosigner on your loan:

Advantages of a cosigner

  • It enables you to qualify for financing when you cannot be eligible on your own
  • It gives you the opportunity to establish or rebuild your credit as you make on-time payments
  • It allows you the chance to obtain a lower interest rate on your loan

Disadvantages of a cosigner

  • It may damage your cosigner’s credit profile if you miss payments
  • It requires the cosigner to pay late fees and collection costs and face possible legal action if the loan is unpaid
  • It can hurt a relationship with a friend or family member if you default on the loan

All in all, a cosigner can be a help if the potential disadvantages are taken into account. Carefully consider the terms of the loan you wish to have before making the decision to involve a cosigner.

Helpful Resources: Consumer Financial Protection Bureau (CFPB)

What Is a Cosigner?

A cosigner is an individual who applies for a loan with someone else –often a close friend or family member– and who agrees to pay off the debt if the other person cannot make payments.

Many lenders are hesitant to approve a loan for someone with no credit history or a poor credit score. A cosigner with a steady income and a high credit score effectively guarantees the loan for the creditor. Student loans, home improvement loans, personal loans, credit card agreements, mortgages, and automobile loans are standard loan agreements that use cosigners.

What Does a Cosigner Do?

When someone cosigns a loan, they agree to take full legal responsibility for the loan if the other signer does not make payments. A lender might ask for a cosigner if a borrower meets some or all of the following:

  • little to no credit history
  • negative information in their credit report
  • employment record is brief or unstable
  • debt-to-income (DTI) ratio is high

Having a second person sign the loan agreement makes the loan less risky from the lender's perspective. Although the cosigner’s credit history and income history do not need to be perfect, their financial history should demonstrate stability and responsibility.

Both the borrower and the cosigner will be subject to a credit check and will need to provide the following information to the lender:

  • driver’s license
  • proof of income (such as pay stubs)
  • verification of address (such as utility bills and photo IDs)
  • Social Security number

A cosigner and a guarantor have similar responsibilities. However, there is one key difference between guarantor vs cosigner. In the case of an apartment lease agreement, for example, a cosigner has the immediate responsibility of paying rent –just as the tenant does. On the other hand, a guarantor is responsible for paying rent only when the tenant fails to do so.

What Is a Cosigner for a Car?

One of the most common loans that require a cosigner is an automobile loan. A parent might cosign a car loan for their child whose lack of credit history makes it challenging to obtain a loan.

Cosigning a loan agreement for a car means your name is on the auto loan application. However, the cosigner’s name is not on the title, and the cosigner has no rights to the vehicle.

Serving as a cosigner is a different legal arrangement than a co-borrower since the latter shares equal rights with another loan applicant. In the case of a car loan, co-borrowers would have equal ownership of the vehicle, and both names would appear on the title.

Cosigners also have the right to view monthly loan statements and late notices, but they may need to obtain a written agreement from the lender before gaining access to the documents. Other cosigner rights vary depending on state laws.

How to Find a Cosigner

Family members and close friends who trust you and believe in your ability to repay the loan are the people who are most likely to serve as a cosigner.

Cosigners should be on a solid financial footing with enough income to pay off the loan if you cannot. When asking someone to cosign your loan, it is essential to be candid about your finances and to describe in detail how you will repay the loan.

Be ready to explain your loan details with your prospective cosigner, including monthly payments, interest costs, and any other pertinent features.

How to Remove a Cosigner

In some cases, a lender may be willing to remove a cosigner from the loan agreement after a specified period of time. For example, the lender may require two years of on-time payments in order to remove a cosigner.

This scenario –called a cosigner release option– should be discussed in advance of signing the loan. Keep in mind that some lenders will not agree to this option since it puts them at greater risk. Regardless, the best way to remove a cosigner is by paying off the loan.

Cosigner advantages and disadvantages

Here are some advantages and disadvantages of having a cosigner on your loan:

Advantages of a cosigner

  • It enables you to qualify for financing when you cannot be eligible on your own
  • It gives you the opportunity to establish or rebuild your credit as you make on-time payments
  • It allows you the chance to obtain a lower interest rate on your loan

Disadvantages of a cosigner

  • It may damage your cosigner’s credit profile if you miss payments
  • It requires the cosigner to pay late fees and collection costs and face possible legal action if the loan is unpaid
  • It can hurt a relationship with a friend or family member if you default on the loan

All in all, a cosigner can be a help if the potential disadvantages are taken into account. Carefully consider the terms of the loan you wish to have before making the decision to involve a cosigner.

Helpful Resources: Consumer Financial Protection Bureau (CFPB)