All About Co-Signers

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Co-signingWhen the lender or credit card company denies your loan or line of credit, often they will tell you that you can reapply with a co-signer to have a better chance of getting approved. But what exactly is a co-signer, how do you find one, and what should you do if someone approaches you and asks you to be one?

In short, a co-signer is someone who acts as security on your loan. If the lender does not believe you are creditworthy, it will not want to risk lending you money that your previous record indicates you may not be able to repay. Therefore, the lender needs an additional line of security to protect itself. This is where the co-signer comes into play. The person who acts as a co-signer agrees to the loan terms alongside you, and if you fail to pay the loan as agreed, the lender has the legal right to require the co-signer to repay it in your place. This gives the lender an additional way to get its money back.

As it might sound, being a co-signer is a risky choice because you might be called on to repay the loan. Even if the primary borrower is responsible, the unexpected, such as a serious injury, job loss, or even death, could force the co-signer to pay instead. Therefore, when you are looking for a co-signer, seek out people who are close to you and who are willing to take a risk on your behalf. Your spouse, parents, grandparents, siblings, other relatives, and close friends are all potential candidates.

In addition to being willing, the co-signer must also be creditworthy and financially able to repay the loan. Lenders will pull the co-signer’s credit report and base the lending decision on how likely the co-signer is to repay the debt. For some types of loans, the lender will also need to see the co-signer’s proof of income to ensure that it is enough to cover the monthly payments.

If someone has asked you to be a co-signer, remember that you need to be able and willing to repay the full amount of the debt if the primary borrower fails to. Ask how much the debt is, what the interest rate is, how long the repayment term is, and how much the monthly payments are. Also, keep in mind that the loan or line of credit appears on your credit report as if it is yours. Therefore, if the primary borrower misses a payment, it will ruin your credit as well as his.

Once the co-signed loan begins, both parties are stuck on the loan agreement for the duration of the loan. If the co-signer wants out, the primary borrower will need to refinance the loan on his own or with a different co-signer. Therefore, take the responsibility seriously and make sure that you know what you are getting into.