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Knowing When to Use a Co-signer

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Many of us who worry about our credit know this simple fact: qualifying for a new loan is never a given. Having a poor credit history, low or inconsistent income can be a massive barrier to getting a new loan.

While I would often advocate borrowing from friends and family for small loans, sometimes the amount you need is too large for them to bear. You could be applying for a home loan, for example. In such a situation, you can enlist the help of family and friends again.

What am I talking about? Well, when a loan application may not go through due to any of the factors mentioned above, a co-signer may be a viable solution.

What is a Co-Signer?

A co-signer is another individual listed on the loan application that acts as a back-up to the primary borrower, giving more security to the lender. Should the primary individual listed on the loan fail to pay on time or in full, the co-signer is required to remit payment. While helpful in getting through the loan process, there are only certain times when adding a co-signer to a loan application makes sense.

When you should get a Co-Signer

You Have Bad or No Credit History

Borrowers with no credit history or multiple negative entries on their credit report may be best served by adding a co-signer to a loan application. Lenders want to feel comfortable that the money they lend to an individual will be repaid based on the terms of the loan agreement, and a spotted credit history is not an indicator that timely repayment will take place. Some lenders offer the option of adding a co-signer who has a strong credit history to the application in order to improve the chances of a loan approval. However, when the primary borrower has severe black marks on their credit report, like a recent bankruptcy, a car repossession due to non-payment, or over-utilization of credit accounts, a co-signer may not help at all.

You’ve Exhausted Other Options

Individuals who are in need of financing for whatever reason have more options than a traditional loan with a bank, credit union, or online lender. There are local lenders willing to loan borrowers the money they need without a hard credit check, so long as there is an asset to secure the loan. If you are from Southern California, this should help you on how to get low interest car title loans in Los Angeles. Similarly, a credit card may be a better option than a traditional loan for borrowers who need cash in a hurry. Not only are borrowers able to avoid the potential of a declined loan application, but there is also no need to reach out to friends, family members, or co-workers about co-signing on a new loan. Different credit accounts come with varying terms and conditions, costs, and repayment schedules, so it is helpful to review these alternatives before making a firm decision on which route makes the most sense.

You Have Discussed Responsibilities

Most people who are tapped as a co-signer are close family members, friends, or colleagues of the primary borrower. There is an inherent relationship there, but some simply see co-signing a loan as a formality to get through the application process. Unfortunately, one-fourth of co-signers say their relationship with the primary borrower was severely damaged because of the loan. Many regret the decision to co-sign for a friend or relative because they end up footing the bill when the primary borrower reneges on his or her responsibility to repay. If the loan bill is not paid, both the primary borrower and the co-signer suffer by way of negative credit history.

Having a co-signer can be beneficial in getting the financing you need for major purchases or unexpected expenses, but it does not always work out as planned. Remember that being a co-signer can be a cause for stress in a relationship. Your co-signer will be putting their credit and money at risk. You’ll be on the hook to make the necessary repayments as usual, but the difference here is that your co-signer is also relying on you. Have a think about whether you are willing to take on that level of responsibility. 

Also, be sure to discuss the responsibilities each party has in the transaction. Above all else, have a solid strategy for repaying the debt you owe on time each month, and create a contingency plan should things go awry.