If you are finding it difficult to qualify for a loan on your own, some lenders may consider a cosigner as part of the application review process. A cosigner agrees to take responsibility for the debt if you do not repay it as agreed, so it is a significant financial commitment for both of you.
Before applying, both parties need to understand how the arrangement works, what the cosigner is agreeing to, and how repayment could affect them.
What is a cosigned loan?
A cosigned loan, or cosigner loan, is a type of borrowing where another person, known as a cosigner, signs the agreement alongside the primary borrower. The cosigner does not usually receive the loan funds, but they agree to repay the debt if the borrower does not.
A lender may review both the borrower’s and cosigner’s information when assessing the application and deciding whether to approve it and what terms to offer.
How do cosigned loans work?
The process starts when you apply for a personal loan. If the lender allows or requires a cosigner, they will also need to provide personal and financial information as part of the application.
The lender may look at both your finances and the cosigner’s, including credit history, income, and existing debts, before making a decision.
If the loan is approved, you will receive the money and be responsible for making the scheduled payments. Your cosigner is also legally responsible under the agreement, but they would only need to repay some or all of the debt if you fail to make the required payments.
The exact process and responsibilities will depend on the lender and the terms of your loan agreement.
Cosigner’s requirements and responsibilities
Cosigner requirements vary by lender, but the lender may look at their:
- Credit history and credit score
- Income and employment
- Existing debts
- Debt-to-income ratio
- Ability to repay the loan
- Identification and residency requirements
The cosigner may also need to provide financial information and sign the loan agreement.
By signing, they agree to take on responsibility for the debt if required under the agreement. That responsibility can continue until the loan is repaid, refinanced, or the lender formally releases the cosigner.
What’s the difference between a cosigner and a co-borrower?
A cosigner and a co-borrower both sign a loan agreement, but they usually have different roles.
- Cosigner: Supports your application and may have to repay the debt if you can’t. They do not usually receive or directly benefit from the loan funds.
- Co-borrower: Applies for the loan jointly and typically shares access to or benefits from the money. They also share responsibility for repayment.
The exact responsibilities can vary by lender and loan agreement, so it is important to check how each person will be treated before applying.
Cosigned loans pros and cons
A cosigned loan can have benefits for you as the primary borrower, but it can also create financial pressure for the cosigner.
Find a more in-depth look at the pros and cons of having a cosigner on your loan here.
What happens if you are unable to repay?
If you miss payments or default, the cosigner may become responsible for repaying the debt under the loan agreement.
The lender may be able to ask the cosigner to cover the missed payments or the remaining balance. Late or missed payments may also affect the credit of both you and the cosigner, depending on how the account is reported.
Because of this, both parties should understand what will happen if repayments are not made before signing the agreement.
Can you remove a cosigner from a loan?
A cosigner usually cannot remove themselves from a loan after it has been agreed. The options available will depend on the lender and the terms of the agreement, but some include:
Cosigner release
Some lenders offer a cosigner release after certain conditions have been met, such as a set number of on-time payments or the borrower meeting eligibility requirements on their own.
Refinancing
You may be able to refinance the remaining balance into a new loan without the cosigner if your financial situation improves. Approval will depend on you qualifying for the new loan.
Paying off the loan
The cosigner’s responsibility ends once you have fully repaid the loan.
What to check before taking out a cosigned loan
Before applying, check:
- Whether the lender accepts cosigners
- What the cosigner will be responsible for
- Whether you can realistically afford the repayments on your own
- What happens if a payment is missed
- How the loan may affect both people’s credit
- Whether the cosigner can be released later
- Whether refinancing may be an option
- Whether another borrowing option could work instead
Both people should read the loan agreement carefully and understand their responsibilities before signing.