Can You Have a Cosigner on a Loan?

Cosigner vs. Borrower: The Difference
Cosigners aren’t just signing their names for show. They are equally responsible for repaying the loan if the borrower defaults. Many people misunderstand this role, thinking the cosigner only adds their name to the loan for formality, but legally, they are as liable as the primary borrower.

Why Lenders Want Cosigners
Lenders typically require cosigners when a borrower lacks a strong credit history or enough income to qualify for a loan independently. Essentially, a cosigner guarantees the lender that someone will make payments if the borrower cannot.

Imagine this: A young adult applying for their first loan might not have sufficient credit history. Even with a stable job, lenders may see them as a risk. This is where a cosigner, typically a parent or close relative, comes into play. The cosigner's stronger credit profile assures the lender that they’ll be repaid.

The Risks of Cosigning
As a cosigner, you take on all the risks without any benefits. You don’t receive any of the loan’s proceeds, yet your credit and financial stability are on the line. Missed payments will affect your credit score just as much as the borrower’s.

Here’s an alarming fact: If the borrower defaults, you could be required to repay the entire loan. Think about that before signing your name. If the loan is for a significant amount, it could be financially devastating for the cosigner.

Impact on Your Credit
Even if the borrower is making regular payments, the loan still appears on your credit report. This increases your debt-to-income ratio, which could make it harder for you to qualify for other loans, such as a mortgage or car loan, in the future.

If the borrower misses a payment, it will be reported to the credit bureaus, damaging both the borrower’s and the cosigner’s credit. In fact, the cosigner's credit can be harmed even faster than the borrower’s if they aren’t closely monitoring the loan’s status.

Cosigner's Rights: Limited Protection
It’s important to know that cosigners have limited rights. If the borrower defaults, the lender can pursue the cosigner for repayment without first going after the borrower. Additionally, cosigners have no ownership rights to any collateral tied to the loan. For example, if you cosign a car loan, you have no claim to the vehicle, but you’re still responsible for the payments.

In some cases, cosigners might be able to release themselves from a loan after a certain number of on-time payments by the borrower. This is known as cosigner release, but it’s not available for every loan and usually requires a formal request and approval from the lender.

When Should You Cosign?
You should only consider cosigning if you are financially stable and fully trust the borrower. If the borrower’s ability to make payments is uncertain, it’s better to say no. Relationships can become strained when a cosigner ends up making loan payments. Protect your financial health and personal relationships by making a well-informed decision.

Alternatives to Cosigning
Rather than cosigning, you might suggest alternative options to the borrower. For example:

• Secured Loan: A loan that requires collateral, like a car or savings account, might be a safer option for both parties.
• Smaller Loan: The borrower might qualify for a smaller loan without needing a cosigner.
• Personal Loan: Borrowers with limited credit might explore personal loans designed for people with less-than-perfect credit, which often come with higher interest rates but don't require a cosigner.

Cosigner Release
Some loans allow the cosigner to be released after a certain period of time or after the borrower has made a specific number of on-time payments. However, the borrower must request the release, and the lender will need to confirm that the borrower can handle the loan on their own.

Real-World Example: A Cautionary Tale
Let’s take the case of Sarah, who cosigned a student loan for her nephew. He assured her that he would handle the payments once he graduated and started working. However, after finishing college, he struggled to find steady employment and started missing payments. Sarah’s credit score took a nosedive, and she eventually had to pay off the loan herself to avoid further damage to her credit. This situation not only affected her finances but also strained their family relationship.

Should You Get a Cosigner?
For borrowers, having a cosigner can be a lifeline. However, if you’re considering asking someone to cosign for you, keep in mind that their financial future is also at risk. Be sure you can meet your payment obligations before involving anyone else.

What to Do Before Cosigning

• Review the loan terms: Understand all the details, including the interest rate, payment schedule, and any potential fees.
• Discuss repayment plans: Be sure both parties have a clear understanding of how the loan will be repaid.
• Monitor payments: Set up notifications so both the borrower and cosigner are alerted about upcoming payments.

Final Thoughts
Cosigning a loan can be a generous act, but it’s not something to take lightly. Whether you’re the borrower or the potential cosigner, carefully weigh the benefits and risks before moving forward. If there’s any doubt about the borrower’s ability to repay, it’s better to seek alternative financing options.