Co-Signers vs. Co-borrowers for Personal Loans: What You Should Know

Asking someone to sign your loan is a huge responsibility.

While it could improve your chances of getting a personal loan with a better interest rate, if you ever default on payments, it can also have a negative impact on your co-signer’s creditworthiness. Here is everything you should know about what a cosigner is and how to get it in case you need it.

What is a co-signer?

A co-signer is a person who applies for a loan from the main borrower and agrees to be legally responsible for the debt if it becomes overdue. People usually get a co-signer for a loan when they cannot qualify for one on their own. Adding someone else with a stronger financial history and credit history can increase the main borrower’s chances of getting approval – and possibly even give them a lower interest rate.

Co-Signers vs. Co-debtors: What’s the Difference?

A co-signer is different from a co-borrower. With a co-borrower (sometimes called a co-applicant), two or more people are equally responsible for the payment – and benefit equally from taking out the loan.

With a co-signer, the main borrower is the one who will benefit from the loans and make the payments. However, if this is not possible, the lender seeks the co-signer to pay. “If someone has below average credit, is just starting out and doesn’t have a solid credit history, or their income fluctuates and they really need a personal loan, then they may consider hiring a co-signer,” says Trina Patel, financial advisory manager at Albert, one automated money management and investment app.

Sometimes you may be asked to add a co-signer to the personal loan approval application. “If I’m 18 and want to buy a car but don’t have a loan, the car rental company can ask my parents to co-sign,” said Tara Alderete, director of business learning at Money Management International, a nonprofit financial consultancy. and education agency.

When applying for a personal loan with a co-signer, the co-signer’s name will appear next to the main borrower on the loan. “When payments are not made on time and [the borrower] If it falls behind, it will also affect the co-signer’s creditworthiness and he will be hooked for this loan, ”says Patel.

“When you ask someone to be a co-signer, you want to make sure they are very close family members or friends who are trusted,” says Patel. “If something happens and you can’t pay back the loan, you want to be sure that it won’t affect your relationship with that person.”

Remember: From a co-signer’s point of view, there is no benefit other than helping someone who is important to them. In fact, many financial experts strongly advise against signing someone else’s loan. “You take full and equal responsibility for this debt,” warns Tiffany “the Budgetnista” Aliche, editor at NextAdvisor. “That means, if your sister doesn’t pay the license, they’ll look for you.”

When does a cosigner make sense?

A co-signer can be useful if you fall in the following scenarios:

  • You have bad credit. A credit score below 580 is rated “poor” by the FICO, so unless you can offer a co-signer, lenders may consider you a high risk borrower.
  • You are self-employed. Lenders are more likely to see you as a stable investment if you have a full-time job and a steady income. Self-employment is considered riskier.
  • You’re young and don’t have an established credit history. With little to no credit standing, the lender doesn’t have much to do with evaluating your application so having a parent can be beneficial.
  • You have a high debt to income ratio. If you have a lot of debt, a lender may wonder whether you should get more out with an additional personal loan. A cosigner can increase your chances.
  • You can make payments yourself. Ideally, the co-signer is involved in the application and approval process, but then never has to step in again. It is best if the main borrower can be self-sufficient and self-administering the loan and only need help with approval.

Personal loan calculator

Advantages of a cosigner

A co-signer can make you a better personal loan applicant for the following reasons:

Better chance of admission

A financially strong co-signer increases your chances of getting approved for a personal loan; You are essentially using their financial profile to complement your own. In most cases, people add co-signers to their loans when they would otherwise not be eligible for a loan.

Potentially lower interest rate

Having a co-signer is also a good negotiating tool and can potentially get you a lower interest rate as well as better chances of approval. Ultimately, having a better interest rate will save you money in the long run because your monthly payments will be lower. A few percentage points can make all the difference, especially if you have a lot of debt.

Disadvantages of a co-signer

Find someone you trust

Securing someone else’s loan and being on the hook when things go wrong takes a lot of trust. So you need to find someone who is familiar with this risk and in better financial shape than you. This will most likely be a family member or close friend.

“[Having a cosigner] basically guarantees the loan, ”says Alderete. “It is important that you find someone with a good credit and repayment history.”

Failure to do so can lead to long-term consequences

When applying for a personal loan with a co-signer, it is assumed that the lead applicant will ultimately make the payments for the loan. But if you start missing payments, your lender could get the co-signer and ask for payment right away. “If it is delayed or overdue, [the cosigner] is required by law to make payments on this loan, ”says Alderete.

These missed payments would also appear in your co-signer’s credit history, affecting their creditworthiness, and affecting their own chances of future creditworthiness. If missed payments lasted long enough (the number of months varies by lender), your loan would default and could be forfeited – meaning both the primary borrower and the co-signer would receive calls from collection agencies asking for payment.

Not to mention the potential relationship damage that comes with failure. When a loan has reached the point of default, it is possible that communication between the main borrower and the co-signer was not open. When entering into a borrower-co-signer relationship, it is important that the borrower report any possible defaulted payments and be aware of the financial burden the co-signer could experience as a result.