What is a cosigner, and how does it affect the loan process?

For young adults, getting approved for a loan can be tricky. Many young Americans have a limited credit history (meaning there isn’t much to show in their credit report), which makes it hard for lenders to approve a loan.

But credit is important for so many aspects of “adulting,” from getting your first credit card to securing an apartment lease. Is there a workaround for having a limited credit history?

There is: It’s called a cosigner. But what is a cosigner, exactly?

What is a cosigner?

A cosigner is someone who agrees to sign on to your loan or lease, thereby agreeing to share financial responsibility with the primary borrower (you).

Basically, a cosigner agrees that if the primary signer (you) fails to repay the loan, they themselves will repay it.

And it’s not just a pinky promise! Cosigners are legally required to pay back loans they cosign on should the primary signer fail to do so. If the cosigner doesn’t pay, the debt can be taken to collections, damaging the cosigner’s credit.

Because of this, it’s important that a cosigner understand the risk they are taking on. Cosigners are financially responsible for loans, credit accounts, and leases that they cosign. They share equal responsibility with the primary signer. 

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With all that said, having a cosigner doesn’t mean that someone else will pay your bills. It just means that if you can no longer pay your bills, the cosigner will be responsible for that debt.

Legally, cosigners share equal responsibility to repay the loan issuer under the original loan terms. But they don’t necessarily make payments unless the primary borrower fails to.

In some cases, a cosigner could be a co-borrower (meaning they plan to contribute to loan payments), like when a couple purchases a new vehicle together. Or they might not be a co-borrower, like when a parent cosigns on their adult child’s car loan.

Cosigners can be used on all sorts of loans, including:

• Auto loans

• Credit cards

• Personal loans

• Mortgage loans

• Refinance loans

Cosigners can also be used on leases for apartments and homes.

How can a cosigner help you get a loan?

Loans allow you to borrow money now and pay it back over time. A lender (usually a bank) will loan you money, and you’ll pay it back in monthly payments — usually with interest.

In order to get a loan, you must first apply with the lender. The lender will access your credit report, which shows any loans, credit cards, and debts you have.

Lenders of course want to make money, so they only want to offer loans to people who are likely to pay them back.

So when you apply, lenders essentially want to see that you’re a responsible borrower who has a history of paying back your debts. If you have a good credit history, they are more likely to approve you for the loan. If you have a history of missed payments or bankruptcy, they may not approve you.

If you’re a young adult just starting out, you simply may not have much credit history. Perhaps you have student loans, but that could be all. In this case, the lender doesn’t have much to go on to determine whether you’re a responsible borrower or not.

This is where a cosigner can help you. Cosigners essentially give the lender a backup in case you fail to repay the loan.

So, if your current credit history doesn’t meet the lender’s standards, they will also look at the cosigner’s credit.

If the cosigner’s credit score is good and they have a generally positive credit history, this will make it easier to get approved for a loan. Plus, cosigned loans may qualify for a higher loan amount, a lower interest rate, or other more favorable terms.

What about cosigners on apartment leases?

Cosigners can also help you get an apartment lease if you have bad credit, low income, or both.

When it comes to leases, cosigners can be a roommate who actually lives with you or a non-tenant, like a parent.

In either case, from a legal perspective, cosigners will be on the lease, have access to the home, and share financial responsibility should you fail to pay rent.

You can also use a “guarantor,” which is similar to a cosigner except that a guarantor doesn’t have tenant rights.

How to use a cosigner on your next loan application

Your cosigner will need to participate in the loan application process. The specifics of this process can vary a bit depending on the type of loan (e.g., credit card, auto loan etc.) but generally, the cosigner will need to provide the following information:

• Their name, date of birth, and other personal information basics

• Their Social Security number

• Their income information

These details will be used by the lender to run a credit check. This may involve accessing the cosigner’s credit report from one of the credit bureaus and/or checking their credit score.

Essentially, the cosigner will have to complete similar steps that you yourself will need to complete during the loan application process.

If you have questions, ask your lender for details about using a cosigner.

Who can be your cosigner?

Technically, anyone can cosign on a loan for you. However, remember that the cosigner is agreeing to take over the legal responsibility to repay your debts if you can’t. So you want to choose someone who you trust — and who trusts you.

Finding a cosigner with good credit is also important. They don’t necessarily need perfect credit, but a cosigner with bad credit likely won’t help you out much.

Parents, grandparents, aunts and uncles, and older siblings could all be viable options. Older family friends may also work. Ultimately, it depends on your relationships and the people in your life.

What are the cons of being a cosigner?

While having a cosigner can make it easier for someone to get approved for a loan, credit card, or even an apartment lease, you should know about the cons before agreeing to be a cosigner.

Remember, as a cosigner, you are taking on full financial responsibility. That means you could end up having to pay someone else’s debt or rent. This could lead you to accumulating debt that you can’t afford, and your credit could be harmed.

For example, let’s say you are a cosigner on someone else’s credit card. They max out their $5,000 credit limit and fail to make their monthly payments. You would become responsible for paying back the $5,000 plus interest. If you are unable to pay the full amount at once, the balance will continue to accrue interest and become a larger expense. In addition, any of their missed payments would appear on your credit report and could negatively impact your credit score.

But you also want to consider more than the potential financial impact of being a cosigner. If the arrangement doesn’t go well, it could cause a strain on your relationship with the person you cosigned for.

Cosigners can make it easier to get loans and leases

A cosigner is someone who signs on to your loan or lease agreement and agrees to take over the financial responsibility should you fail to repay your debts.

Using a cosigner can make it easier to get approved for a loan, particularly for young people with limited credit history. It can also make it cheaper, as you may potentially qualify for a better interest rate or other more favorable loan terms.

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