Co-Signer

Co-signer summary:

• A co-signer helps another person’s loan application by agreeing to take equal responsibility for the debt.

• The presence of a co-signer reduces risk for the lender, especially if the main borrower has a low credit score or income.

• When you apply for a loan with a co-signer, you might qualify for a lower interest rate or a larger loan amount.

Co-Signer Definition and Meaning

A co-signer is another person on a loan who agrees to take legal responsibility for the debt. If the primary borrower has a low credit score or income, a co-signer could help them get approved. Co-signers are taking a financial risk, because any missed or late payments could affect their credit score, and they must repay the debt if the main borrower doesn’t. Co-signers don’t get access to the borrowed money.

How Getting a Loan With a Co-Signer Works

When you apply for a loan, the lender reviews your financial information and runs a credit check on you. The credit check shows the lender your history of borrowing and paying back money and a credit score based on that information. Your credit score is a measure of how likely you are to repay debts on time.

If you apply for a loan with a co-signer, then the lender also considers your co-signer’s financial information. Instead of the loan application depending entirely on your finances and credit score, it becomes a team effort. The co-signer is agreeing to be legally responsible for the loan, which makes the loan less risky for the lender.

A co-signer with a higher credit score and/or income could help you:

• Get approved for a loan

• Borrow a larger amount of money

• Qualify for a lower interest rate 

Key Aspects of Co-Signers on Loans

Co-signers only come into play in two situations: During the loan application process and if the main borrower misses any payments.

During the application process, the co-signer provides their information and agrees to co-sign on the loan. After that, the loan proceeds as normal. If the lender approves the application, then the main borrower receives the money and is responsible for making payments by the due date.

The lender only contacts the co-signer in the event of nonpayment. Lenders may reach out to co-signers after one missed payment or when the loan is in default, depending on the loan contract.

The co-signer or the main borrower must catch up any outstanding payments and continue making the loan payments going forward. The lender can report missing and late payments on the main borrower’s and the co-signer’s credit history, which can impact both their credit scores.

Types of Loans That Accept Co-Signers

Practically any type of loan can have a co-signer, but the decision is ultimately up to the lender. Some lenders accept co-signers, and others don’t. Types of loans that can accept co-signers include:

• Debt consolidation loans

• Personal loans

• Auto loans

• Student loans

• Mortgages

Other types of contracts also accept co-signers. One of the more common examples is lease agreements.

Landlords may allow prospective tenants to apply with a co-signer. In this situation, the co-signer agrees to pay the rent if the tenant doesn’t. The co-signer is also equally responsible for any damage to the rental unit caused by the tenant.