Key takeaways
- When you co-sign for a loan, you are equally responsible for paying it off, and promise to repay the loan if the primary borrower defaults.
- Co-signing a loan doesn’t give you partial ownership of the property the funds are paying for — such as a vehicle or boat.
- If the primary borrower defaults on the loan, it could lower their credit score and yours.
For individuals with a poor credit history or no credit history at all, finding a bad credit lender who will lend to them can be tricky. Getting a friend or a family member with a better credit history to co-sign a loan can make lenders more likely to grant these individuals a loan.
But becoming a co-signer should not be taken lightly. A co-signer takes on all the rights and responsibilities of a loan along with the borrower. This means that if the borrower can’t make a payment on the loan, the co-signer is responsible.
If you are considering becoming a co-signer for a friend or a family member, consider the impact it may have on you and your financial history before agreeing to sign on to the loan. It is also important to make sure you know the interest rate on the loan and calculate its monthly payments, as this will impact how risky it may be to co-sign.
Co-signer statistics
- 21% of U.S. adults have co-signed a loan or another credit product to help out a loved one.
- 18% of those who co-signed a loan for a loved one reported losing money. Meanwhile, 20% reported damages to their credit score.
- Co-signing is more likely among the parents of adult children as they represent 29% of all individuals who co-signed a loan to help a loved one.
- Co-signers typically need a credit score of 670 or higher and a debt-to-income ratio of less than 50% to be approved for the loan.
What is a co-signer?
A co-signer is a person who guarantees the debt of another individual. They are equally responsible for the debt, and must pay if the borrower does not make payments or defaults on the loan.
What is the difference between a co-signer and a co-borrower?
There are two types of parties that can apply for a loan alongside the primary borrower: a co-signer and a co-borrower. In both situations, all parties are legally responsible for the debt that’s being taken out. The credit scores and financial details of both parties are also considered in the application.
While both co-signers and co-borrowers take on responsibility for a loan, the two have several key differences:
| Co-signers | Co-borrowers |
|---|---|
| Have no title or ownership in the property the funds are for. | Are on the title or have some claim to the property. |
| Are legally obligated to repay the loan, but only socially expected to if the primary signer falls behind. | Split the repayment obligation equally with the other borrower. |
| Must have their income, assets, credit score and debt-to-income ratio considered in the loan application. | Must have their income, assets, credit score and debt-to-income ratio considered in the loan application. |
Co-signer responsibilities
If you’re considering co-signing a loan for someone, it’s important to know upfront what responsibilities you will have.
| Paying back the debt | When you co-sign a loan, you take on financial responsibility. If the primary borrower fails to make the monthly payments, that responsibility will fall on you. If you do not keep up with the payments, you may owe penalties, late fees and additional interest. |
| Gathering information and documents | Credit history, credit score, income, debts, employment and other financial details are all likely to be considered as part of the loan application when you agree to become a co-signer for someone. During the application process, a co-signer must gather all the related documents so that the primary borrower can submit their application. |
| Co-signer credit score may be affected | A loan you co-sign will be added to your credit history, which will impact your credit score. While you are not the primary person responsible for making payments, your credit score will be affected by how promptly payments are made. This means that co-signing could help or hurt your credit score depending on the actions of the primary borrower. |
Co-signer rights
As you weigh the pros and cons of becoming a co-signer, review the rights of a co-signer to get a complete understanding of the financial implications.
| You don’t own the property | Being a co-signer doesn’t give you rights to the property, car or other security that the loan is paying for. You are the financial guarantor, meaning you must make sure the loan gets paid if the primary borrower fails to do so. |
|---|---|
| Face collections before primary owner | When you agree to be a co-signer, you agree that collections can hold you responsible for a defaulted loan amount. According to the Federal Trade Commission, a co-signer can face collections for the loan amount before the primary borrower. |
| Co-signers can potentially be removed from the loan | Depending on the lender, the borrower may be able to release you from the loan using a form called a co-signer release. However, this can only be done at the primary borrower’s request, and the lender must approve it. |
What to consider before becoming a co-signer
If you’ve been asked to co-sign on someone’s loan, you should consider all the factors before agreeing. Your good credit could help a loved one achieve their financial goals, but is it a good thing for you? Consider the following before you take on additional debt.
The type of loan you’re co-signing for
Secured loans put collateral on the line — a house, a car or another piece of property. This means less risk for the bank because the collateral will be seized if the primary borrower cannot make their payments and you don’t fulfill your obligation. However, you should consider when this is a good idea for all individuals involved, especially if it’s your asset at risk.
Your financial situation
Generally, lenders want to see co-signers with high credit scores, blemish-free credit reports and long histories of consistent, on-time payments. They’ll also want you to have steady employment and verifiable income. Does this apply to your financial scenario? If it does, are you willing to risk your high-credit status to co-sign the loan?
Your relationship with the primary borrower
You shouldn’t co-sign a loan for just anyone. Think about your relationship with the primary borrower and consider how well you can trust them. Do you trust that they will make on-time payments? Or, are you worried they may not be able to keep up with the responsibilities of the loan?
You’ll want to be able to have open and honest conversations with the primary borrower about money. You both need to feel good about the agreement. The last thing you want is to ruin your relationship over financial tension.
The long-term implications of being a co-signer
If you’re co-signing a loan to help your child go to college or build up credit early on, then the risk may be worth it in the long run. If you’re simply helping a friend pay off credit card debt or buy a car that’s outside of their price range, it’s probably not the best move for you or for them, as it can potentially damage both of your finances.
Personal loan lenders that allow co-signers or co-borrowers
Most personal loan lenders do not allow co-signers. Instead, you will likely need to fill out a joint application where each person has equal responsibility for and access to the loan.
| Lender | APR | Loan terms |
|---|---|---|
| Mariner Finance | Not specified | 1-5 years |
| Laurel Road | 9.94%-24.25% (with autopay) | 3-5 years |
| SoFi | 8.99%-29.49% (with autopay) | 2-7 years |
| LightStream | 7.49%-25.99% (with autopay) | 2-12 years |
| LendingClub | 8.98%-35.99% | 2-5 years |
| Upgrade | 8.49%-35.99% | 2-7 years |
The simplest way to find other lenders that allow co-signers is to ask. A lender may not advertise it or list it as an option in the FAQ, but if you reach out before you apply, you may be able to apply with a co-signer.
Mariner Finance and Laurel Road both allow you to apply with a co-signer. While SoFi, LightStream, LendingClub and Upgrade allow co-borrowers and joint applications. This means that both the primary borrower and the co-borrower will have access to the loan funds.
Frequently asked questions
Yes, being a co-signer for someone else’s loan can hurt your credit. To begin with, the loan will show up on your credit report. In addition, if you want to apply for a loan of your own at some point, the outstanding debt associated with the loan for which you are a co-signer will affect your loan application.
Yes, it is possible to get out of a loan if the primary borrower and the lender agree to a co-signer release. All lenders have different criteria for co-signer release, but in general, the borrower will have to demonstrate that they have the credit or repayment history needed to qualify for the loan on their own.
It is possible to remove a co-signer without refinancing. However, in most cases, the lender will likely require the borrower to refinance the loan anyway. This is because it’s unlikely that the borrower would qualify for the same rate and terms without the co-signer.
The process of co-signing is similar to borrowing money for yourself. You’ll have to provide an identification, your Social Security number and other personal details, as well as proof of income and assets. Using this information, the lender will then run a credit check to see if you meet the requirements.Although you won’t get any of the loan proceeds, if the borrower is approved for the loan, this account will show up on your credit report. That means it can affect your credit both positively and negatively, depending on how the borrower handles the account.
Yes, when you co-sign for a loan, the additional debt increases your debt-to-income ratio — which compares your monthly debt against your gross monthly income. If your DTI becomes too high, it could affect your ability to qualify for a mortgage.
