What is a Cosigner? Understanding the Benefits and Risks of Shared Borrowing Responsibility

My first car was a white Volkswagen Jetta, and I loved that car. I saved up for the down payment by working at Dairy Queen and was so excited to make my first big purchase. However, I needed financing and was having a little trouble with my credit history — or lack thereof. 

I was distraught. I couldn’t believe I’d mixed that many Blizzards just to hit a roadblock because of my credit. Thankfully, my parents swooped in to save the day by becoming cosigners on my loan. 

A cosigner is someone who is legally and financially responsible for a loan or credit card in addition to the primary borrower. 

People use cosigners when they can’t qualify for a loan or credit card by themselves or when they want to get a lower interest rate than they would get as the sole applicant. If you can’t qualify for credit alone, a cosigner can be a necessary lifeline, enabling you to buy a house, take out student loans, or get your dream Jetta like me.

Technically, anyone can be a cosigner. Most of the time, people add close family members as cosigners. However, you don’t have to choose someone you’re related to. In fact, you can technically add on anyone you want, like a boyfriend, best friend, or even a coworker. Most people use family members because they’re more likely to say yes than a friend.

Keep reading to understand how cosigners work, when you should get one, and what to do if you’re asked to be a cosigner.

First, if you’re considering adding a cosigner to an existing loan, you’re out of luck. You can only add a cosigner to a new loan, not an existing one. However, you can refinance a loan and add a cosigner if you want to get a better interest rate and term.

If you’re the borrower, you will be asked if you want to add a cosigner during the initial application. 

You will have to share the following information about your cosigner:

• Full legal name
• Residential address
• Social Security number

The lender will run a credit check on the cosigner, which includes checking their credit to verify that they’re a good choice. The lender may also want to verify the cosigner’s employment information, since annual income is an important factor when approving a loan application.

Both you (the original borrower) and the cosigner will have to sign the lending agreement that includes all the loan details. Once that agreement is signed, the loan amount will be disbursed and payments will begin. 

Once the payments start, they will appear on both your and your cosigner’s credit report. If a payment is more than 30 days late, it will be reported as a late payment and can negatively affect both parties’ credit scores. 

Financial Products that Allow Cosigners

Most types of loans let you add a cosigner, including mortgages, personal loans, auto loans, and even private student loans. However, every lender is allowed to make its own policy on whether they allow cosigners. 

Also, lenders can set their own standards on the type of credit score and income a cosigner must have to be eligible. One thing I will note: It’s very hard to add a cosigner to a credit card. 

The following banks do not allow cosigners:

• American Express 
• Bank of America 
• Capital One 
• Chase 
• Citi
• Discover 
• Wells Fargo

If you want to get a credit card and are having trouble finding an issuer that accepts cosigners, start with a local bank or credit union. They may be more receptive.

Some loans allow cosigner release, which is when the lender removes the cosigner once the original borrower meets a few requirements. The exact requirements will vary depending on the lender. 

Usually, the borrower must have made at least a year or two years of on-time payments. Also, the original borrower must have good enough credit and income to qualify for the loan by themselves.

However, not all lenders allow cosigner release, and you shouldn’t count on it if you’re the cosigner. It’s best to assume you’ll be the cosigner until the loan is paid off. Lenders are hesitant to remove a cosigner because cosigners mitigate their own risk — if the borrower runs off without making their loan payment, the lender can go after the cosigner to recoup its money.

Another way to remove a cosigner is to refinance the loan by yourself. Refinancing means choosing a new loan with a different lender. To qualify for refinancing, you must have a good credit score and a low debt-to-income ratio. Simply put, you must have improved as a loan candidate since you took out the loan originally.

In some cases, you can qualify to refinance by yourself, but you won’t receive a better interest rate. It may be worth refinancing if the cosigner is applying for their own loan and needs you to remove them from the loan to improve their debt-to-income ratio.

Reasons for Cosigning

If you have poor credit or no credit history, you’ll likely need a cosigner to be approved for a loan or credit card. This is especially true if you are applying for a major loan, like a mortgage. When a lender gives money, they want to be sure they will be repaid. It’s hard to trust a new borrower or someone with a shady credit history, so that’s where cosigners can help.

This is especially true for young people who don’t have any credit cards or loans, like my situation with my first car loan. In fact, many young people need a cosigner just to qualify for an apartment lease. If you’re not a U.S. citizen, having a U.S. citizen cosigner may also increase your chances of being approved.

Beyond having good credit, you need to have sufficient income to qualify for a loan. If your income isn’t high enough to be eligible, then adding a cosigner can help you meet the lender’s desired debt-to-income (DTI) ratio.

Differences Between a Cosigner and an Authorized User

Many consumers don’t understand the difference between a cosigner and an authorized user, which mostly comes into play with credit cards. 

A cosigner will be liable for payments if the original borrower defaults. The cosigner will not receive a copy of the card or access to the account. Instead, they are simply the backup plan if the original borrower reneges on their responsibility. 

An authorized user is not liable for payments. But they will receive their own copy of the card and can make transactions as they please. Authorized users are typically young adults on their parents’ accounts, though other arrangements certainly exist.

The card account will appear on both cosigners’ and authorized users’ credit reports, so if the primary cardholder stops making payments, their own credit can be negatively impacted.

Differences Between a Cosigner and a Co-Borrower

It’s common to get the terms cosigners and coborrowers mixed up. However, there’s a major difference. A co-borrower is equal to the main borrower and is treated the same, meaning they have the legal right to the loan proceeds or the item in question.

However, a cosigner usually does not have an equal right. For example, if you cosign for an auto loan, you are not legally entitled to the car, even if the main borrower stops making payments and you take over. However, if you are a co-borrower, then you are a legal owner of the car.

This is one reason why being a co-borrower may be better than being a cosigner, because you can legally take and sell the item if the main borrower stops making payments.

Cosigning has lots of pros and cons, depending on which side of the coin you’re on. Here are the most common benefits and drawbacks associated with cosigning.

Benefits

If you’re a borrower wondering if you should add a cosigner, the answer is often yes. Having a cosigner can help you get a lower interest rate, which can save you up to tens of thousands of dollars in total interest. If you’re applying for a major loan, like a mortgage, having a cosigner can get you preapproved faster, which can help in a seller’s market.

Even if you can qualify for a loan or credit card alone, you may receive a lower interest rate or better overall terms if you add a cosigner. If your cosigner has a better credit score than you do, you may be considered a more attractive loan candidate.

Having a loan or credit card on your credit history can help you build credit, as long as you make payments on time and use your credit responsibly. This can ensure you’ll be able to qualify for a loan by yourself in the future.

Drawbacks

The worst part of being a cosigner is the risk that you’re taking when you sign up to cosign a loan. Until the loan is paid in full, you have to live knowing that the borrower might mess up your credit just by missing a payment or two. This can create a lot of financial stress.

Plus, your life will be affected even if the borrower never misses a payment. That’s because the loan will be counted in your debt-to-income ratio. This will affect how much you’re allowed to borrow for yourself.

You should try to avoid cosigning for someone if you’re planning on taking out a major loan before they will repay their loan. 

Also, it can negatively affect your relationship if the original borrower misses a payment or defaults. When your own credit score is impacted, it can be hard to forgive the other person, especially if you’re planning on taking out a loan or other credit product in the near future. Defaults stay on your credit report for seven years.

Before asking someone to be a cosigner, you should understand what makes some cosigners better than others. Remember, the cosigner will be evaluated just as much as the primary borrower. If you pick the wrong cosigner, you can still be denied a loan or credit card. Here’s what you should look for:

They Should Have Good Credit

The first rule when looking for a cosigner is that they need to have a good credit score, hopefully a 700 or higher. If their score is too low, then adding a cosigner won’t boost your chances of being approved. 

They also need to have an income source that proves they can handle the loan. The exact required income varies depending on the loan amount and the cosigner’s income. Also, it’s usually safer to choose someone with a steady income source from a W-2 job rather than someone who is self-employed or has a variable income. 

Cosigners usually need to be U.S. citizens and have a valid Social Security Number. The relationship between the borrower and the cosigner does not matter. Choosing a parent isn’t inherently better than choosing your girlfriend of three years.

Clear Communication of Expectations is a Must

Becoming a cosigner means entering into a legal agreement with someone. Ideally, you should have an established foundation of trust with the other person. If you’re the cosigner, you should also explain to the borrower that they need to talk to you ASAP if there’s even a slight chance of them missing a payment.

For example, if you’re the cosigner, you can make it clear that you’re willing to help out if the main borrower is struggling financially. It’s much better for both parties if you step in and make payments before there are any late or missed payments that could cause a huge drop in both your credit scores, which could take months or even years to fix.

You should also look at your cash flow and monthly budget so you understand how long you could make payments before your own financial life would be impacted. Also, if you do make any payments, will you expect the other person to pay you back later? If so, how soon will you expect the money? Talking about these issues beforehand can clarify a potentially murky situation.

Remember, becoming a cosigner is a legally binding contract. It doesn’t matter if you stop talking to the person, get divorced, or disown them — the lender will still hold you liable for the loan. This is another reason why cosigning for someone is such a big deal. 

Make Financial Preparations

Most cosigners enter into the lending arrangement assuming the best. For some, this optimistic outlook works out. But for others? They are shocked when the borrower can’t afford to make payments and defaults on the loan, leaving their own credit score in tatters for years.

That’s why a cosigner should always be prepared to be financially liable for the loan, even if the original borrower swears they’ll never miss a payment. Things happen  —  people get laid off, become disabled, or simply choose other financial priorities. It’s better to acknowledge the worst-case scenario and be ready than to be taken by surprise.

“That’s why a cosigner should always be prepared to be financially liable for the loan, even if the original borrower swears they’ll never miss a payment.”

Also, in some cases, if the original borrower passes away, then the cosigner will have to take on their loan. The lender may even be able to require that you pay off the entire remaining balance. It might sound like overkill, but you should consider whether you have the liquid funds to pay for the balance if the borrower dies while the loan is still active.

Even though it sounds morbid, you should consider what will happen to the loan if the original borrower dies. Read through the lending agreement and make sure you understand if you’ll have to take over the whole loan. You may want to ask the borrower to make a stipulation in their will to leave you enough money to pay off the loan balance.

If you don’t have anyone to ask or would prefer not to use a cosigner, there are other ways to qualify for credit, even if you’re on your own. Here are some popular options if you want to avoid getting a cosigner. 

Secured Credit Cards

Whether you’re fixing a bad credit score or building a credit score from scratch, a secured credit card can help. Unlike regular credit cards, secured credit cards require a cash deposit that acts as collateral. 

That way, if you default on the card, the credit card issuer can use your security deposit to pay off the balance. The deposit is usually equal to the credit limit, which is the maximum amount you can spend on the card. 

Many providers offer secured credit cards, and you don’t need a cosigner to open one. Plus, many secured credit cards will review your account after a few months to determine if you qualify for a regular unsecured credit card. If you do, they will upgrade your card and return your security deposit.

Credit Builder Loans

A credit builder loan is a loan that — just like the name implies — helps improve your credit score. Only certain companies offer credit builder loans, and it’s important to compare fees and terms before signing up.

Here’s how it works:

1. You decide on the monthly payment and term you can afford. 
2. Then, every month, you make a payment to the lender. They will hold those funds in a separate account. 
3. Once the loan term is over, you will receive the money you paid, minus any required fees.

During this time, your monthly loan payments will be reported to all three credit bureaus, so you’ll have a positive payment history by the time the loan ends. This can help improve your credit score from poor to good, or even excellent.

The downside of a credit builder loan is that you will have to pay a small fee. However, these loans can be more manageable than secured credit cards because they don’t require a large upfront deposit. 

Becoming an Authorized User

If you want to build credit without finding a cosigner, becoming an authorized user can be an easier option. 

Here’s how it works:

1. Once you become an authorized user, you’ll receive the card’s credit history on your credit report. 
2. Some credit cards charge a fee for adding an authorized user, so you may want to consider paying that fee just to be polite.
3. You don’t even have to make charges on the card to reap the benefits. In fact, some cardholders may prefer not to give you a card just so you don’t rack up a balance.

If you do receive a card, make sure to watch your spending and never charge more than you can afford to repay. 

If someone asks you to be a cosigner, you should be aware before signing up. Cosigning on a loan is actually worse than taking out a loan yourself.

Most of the time, cosigners don’t realize the risk they’re taking in the same way that they do with their own loans and credit cards. Plus, if the original borrower makes several late payments, your own credit score could tank.

If you still want to cosign, you should only do so if you can easily afford to assume the payments yourself. Also, you should not be in the market for a major loan. Cosigning a loan can count against your debt-to-income ratio and make it harder to qualify for some loans, like mortgages.

And if someone offers to be a cosigner for you, take it seriously. It’s been almost 20 years since my parents cosigned my first car loan, and I still appreciate what they did for me.