What is a CoSigner?

If you don’t have a solid credit history or consistent income, you may need a cosigner to help secure a loan. Similarly, if a friend or family member needs a cosigner, it’s important to understand both the benefits and risks before entering this financial arrangement. Here’s an overview of how cosigning works – and what both borrowers and cosigners need to consider.

The function of a cosigner

A cosigner is someone who agrees to take over the borrower’s debt if they fail to meet the loan’s payment expectations. Lenders like cosigners when extending credit to borrowers with limited experience because it provides security that the loan will be repaid. However, if the borrower defaults, the cosigner is equally responsible for the debt. Cosigners must have an above-average credit history and a stable income to qualify, says Justin Pritchard, a financial advisor and contributor to The Balance.

Who needs a cosigner?

Many borrowers  –  particularly young adults with short credit histories or those with low or unstable incomes  –  may need a cosigner to help secure a loan. Lenders also take into account the borrower’s debt-to-income ratio. If more than 43% of the borrower’s income goes toward debt repayment, they’ll likely need a cosigner.

Risks to consider as a cosigner

Cosigning is a serious financial commitment. If the borrower misses payments, the cosigner becomes responsible for the loan. Cosigners should be aware that if the borrower is 90 to 180 days late on payments, the cosigner could be sued. Additionally, cosigning may temporarily lower the cosigner’s credit score due to the hard credit inquiry, and the loan will count as part of their debt ratio, which can affect future credit opportunities.

Bridget Campbell (NMLS #481581), CMB, Regional Residential Mortgage Sales Manager at Five Star Bank, shares, “an important consideration for a cosigner is that they will be attached to the loan until the borrower refinances and removes them. They cannot simply be taken off the loan at any time. This can be tricky due to fluctuating interest rates.”   For example, people who cosigned loans in 2020 or 2021 when rates were low (e.g., 2% or 3%) are not likely to ever be removed from those loans, as a borrower would have little incentive to refinance at a higher interest rate. Anyone considering cosigning should make sure to ask all the right questions and completely understand the full impacts of their decision.   Though risks to the borrower are minimal, they should be mindful that failing to repay the loan could damage their relationship with the cosigner and hurt the cosigner’s credit score.

Benefits of being a cosigner

Cosigning may help someone pursue important financial goals, such as furthering their education or buying a home. Additionally, cosigning might improve a cosigner’s credit history if the borrower makes timely payments. According to NerdWallet, cosigning may allow the cosigner to diversify their debt profile, which can positively influence credit.

Here to help

If you’re considering a loan and would like to explore your options, reach out to a Five Star Bank representative today.