Cosigning on a Loan? Here's What to Expect

Entering 2024, the national U.S. household debt stands around $17.3 trillion according to reports by MarketWatch,¹ signaling a 4.8% growth in debt between Q3 2022 and Q3 2023. This figure includes debts such as mortgages, student loans and credit cards. And with cash-strapped Americans seeking relief, many may be seeking cosigners to help them qualify for extra cash in the form of loans.

If a friend or family member asked you to cosign a loan, what would you do? Before you agree to be a cosigner or a co-applicant, it's important to understand what your responsibilities are and how cosigning a loan can affect your credit.

When you cosign a loan, you’re taking on debt. Even though you’re not the primary borrower, saying “yes” can impact your credit score and your financial health. To help you determine the right path, here’s an overview of the ins and outs of cosigning a loan.

What is a cosigner?

A cosigner is someone who signs a loan alongside a borrower to help them get approved. There are a few reasons why the original borrower might not qualify for the loan on their own, including poor credit score, low income, lack of borrowing history or history of bankruptcy. Having a cosigner can improve their chances of getting approved.

The cosigner acts as a sort of insurance policy for the lender. If the original borrower cannot make a payment, the lenders will ask the cosigner to pay. Typically, the cosigner will have a better credit history and/or higher income than the primary borrower. Cosigners are often a family members or close friends of the loan applicant. Lenders may have requirements such as cosigners residing in the same household or fitting certain family relationships.

So, what does it mean to be a cosigner? Let’s clear up a few common misconceptions:

• Cosigning is not just a character reference. As a cosigner, it's most common to be equally liable with the primary borrower — sometimes called "joint and several liability" — which allows the lender to pursue all parties at any time. Pay attention to the terms of the loan agreement.

• The lender will not necessarily pursue the borrower for repayment first. Less commonly, a cosigner might be "contingently liable," meaning the lender can only demand payment from the cosigner after the primary borrower fails to meet an obligation.

Pros and cons of cosigning

When it comes to cosigning a loan, consider both the advantages and disadvantages. Here's a closer look at the pros and cons:

Pros

• You can help a loved one get approved: By cosigning a loan, you can help improve someone’s chances of getting the loan that they need. If someone has fallen into hard times, cosigning a loan could help them get a hold of their financial situation.
• You can help someone get a lower interest rate: If you have a strong credit score, cosigning may help the primary borrower get a lower interest rate, which would help them save money over time.
• You can diversify your credit: The types of credit you have is a factor in your credit score — it can help to have a variety. That means cosigning a loan could count as a new type of credit for you and may increase your credit score.

Cons

• You’re responsible for repayment: Just like the primary borrower, you’re legally on the hook to repay the loan. If the borrower misses any payments, the responsibility falls to you, and you end up hearing from the lender’s debt collection team if you don’t make the payments yourself.
• It could negatively impact your credit score: Some people wonder, “Does being a cosigner affect your credit?” Well, it could, since the loan is typically reported on both parties’ credit reports. So, any missed payments or a default on the loan could lower your credit score and damage your creditworthiness.
• You might have a harder time getting a new loan for yourself: Since the new debt is part of your credit profile, it could lower your chances of getting approved for a loan of your own.
• Your relationship might become strained: It’s always difficult to mix relationships and money. Any disagreements about the loan could cause tension between you, the main borrower and other friends and family. Now that we’ve covered the pros and cons of cosigning a loan, let’s dive deeper into the specifics of being a cosigner.

Does a cosigner have to show proof of income?

Yes, a cosigner generally needs to show proof of income. They may be required to provide the same kind of proof-of-income documents as the primary borrower.

What debt can I cosign?

You can cosign on various types of debt, depending on the lender's policies and your willingness to assume responsibility for the loan. Common debts that individuals may cosign on include:

• Auto Loans: You can cosign on an auto loan to help someone purchase a vehicle. This is a common scenario, especially for young adults or individuals with limited credit history.
• Student Loans: Cosigning on a student loan can assist students in obtaining financing for their education. It's often used when students have insufficient credit or income to qualify for loans independently.
• Personal Loans: Some personal loans may allow for cosigners to strengthen the borrower's application, typically for those with less-than-ideal credit.
• Credit Cards: While less common, there are credit card issuers who permit cosigners on credit card accounts. This can be helpful for individuals looking to build or rebuild credit.
• Apartment Leases: Landlords may require a cosigner for tenants with limited rental history or lower income to ensure that rent payments are covered in case the tenant defaults.

How is a cosigner’s credit affected?

Cosigning a loan typically appears on your credit report, even if the primary borrower makes all payments on time and in full.

The total amount of the loan is considered as your debt and factored into your debt-to-income ratio (how much you owe compared to how much you make) when you apply for credit on your own. This means that cosigning a loan can affect your credit score and limit the amount you can borrow.

Does cosigning hurt your credit?
If the primary borrower misses a payment, it can show up on your credit report, which doesn’t look good on your credit.

Who gets the credit on a cosigned loan?
Ultimately, the cosigned loan will impact both the primary borrower and the person cosigning a loan.

How long is a cosigner responsible?

Unless your loan agreement specifically allows a cosigner to be released under certain circumstances, then a cosigner is responsible for the full length of the loan (sometimes called the “term”), just like the primary borrower. If the loan has a 12-month repayment period, then the cosigner is responsible for the full year. If payments are missed, the cosigner will be held responsible until the loan is repaid.

Think before you cosign

As much as we want to help our loved ones make financial progress, it’s important to consider all the risks before cosigning a loan. Be sure to research and fully understand how the loan could impact your credit first.

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1. https://www.newyorkfed.org/newsevents/news/research/2022/20220802

This article has been updated from a previous posting on 2020 and 2022. Matt Diehl contributed.