What Does a Cosigner Do?

What Does a Cosigner Do?

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By Rickie Houston CEPF®

What is a cosigner?

If you meet a lender’s credit and income requirements, you’ll normally have free rein to take out loans on your own. But in circumstances where your credit levels aren’t high enough, or if you have no credit history at all, it may be wise to use a cosigner. Cosigners assume equal responsibility of a loan’s payments, meaning that they also take on a certain level of risk.

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What Is a Cosigner and Why Do You Need One?

A cosigner is someone, typically with a strong credit history, who acts as the backup plan in case you are unable to make the payments for a loan you borrowed. Once someone cosigns on a loan you’ve taken out, the cosigner will be legally obligated to make the payments on the loan if you can’t. Cosigners could be friends or family.

Cosigners can be useful in instances where lenders have credit score minimums, income requirements or other requirements. But you will only be required to use a cosigner if you don’t meet the requirements. If you qualify on your own, you won’t need another person for debt such as car loans, apartment rentals or credit cards.

Should You Use a Cosigner?

You may need to choose a cosigner at some point if any of the following apply to you:

  • Your credit level doesn’t meet that of the lender’s requirement
  • You have no credit history
  • Your income falls below a lender’s income requirements
  • You have a high debt-to-credit ratio
  • Your monthly income fluctuates

As mentioned earlier, cosigners offer an extra layer of security to lenders who are looking to give out loans to those who don’t quite meet the credit or income requirements. You should consider using a cosigner if the above applies to you. If you’re on the cosigning end, however, you may want to consider the risks associated with cosigning someone else’s loan.

Bottom Line

If a friend, spouse or family member cosigns on a loan you’ve taken out, both you and that individual have equal responsibility in ensuring that it’s duly paid in full. Cosigners typically have strong credit histories and consistent income. This is why lenders rely on them as financial safety nets.

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Photo credit: ©iStock.com/AndreyPopov

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