Definition
A cosigner is an individual or business entity that bears the burden of demonstrating creditworthiness when an applicant lacks sufficient credit or collateral.
Analysis
Cosigners can allow an applicant with a limited or poor credit history with the opportunity to receive credit and on better terms than they could otherwise be expected to gain on their own. It is common for a spouse or a parent to cosign for family members.
Many cosigners fail to adequately understand the responsibilities they are undertaking when they cosign a loan. Some are asked to cosign by those with poor credit histories, many of whom are incapable or unwilling to repay the loan in full.
A cosigner may find that the lender will aggressively pursue repayment of a delinquent account through them rather than the applicant. Debt collectors know that the cosigner is more likely to have the capacity to repay the debt.
Agreeing to cosign a loan means that you:
- Have the ability to repay the loan should the applicant become unable to pay
- Be willing to repay the loan if the appliicant refuses to pay
- Accept legal liability for the debt, and understand that the lender could pursue a judgment against you if the loan is not repaid
Cosigning a loan is a serious act, and it requires thoughtful evaluation to determine if it is a good idea. Our counselors recommend that cosigning be limited only to helping a close familiy member gain approval for a first major credit item, such as a car or home, and only if the cosigner has the capacity to repay the loan.
A cosigner may seek to place a lien on the applicant’s collateral in the case of secured loans. This helps to retain the cosigners interest in the property, and to grant them the ability to control the asset if the applicant becomes unable or unwilling to pay.
Applicants with poor credit frequently request for others to cosign on their loan so that they may purchase something they otherwise would not gain approval for on their own. This is usually a bad idea. If that person already has bad credit, then it is an indication that they are also somewhat unlikely to repay this loan.
If someone asks you to cosign for them, evaluate whether it is a good idea. Ask yourself if nonpayment would result in strained relations. If you need to say no, inform them that you are not a bank!
A cosigner is similar to a guarantor, except that a debtor’s credit history is ignored when a guarantor is needed.
