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Last update: September 23, 2024
5 minutes read
Learn about cosigning and get a clear understanding of its implications. Explore the meaning of cosigning, with insights to help you make smart financial choices and boost your loan knowledge.
By Brian Flaherty, B.A. Economics
Edited by Rachel Lauren, B.A. in Business and Political Economy
Learn more about our editorial standards
By Brian Flaherty, B.A. Economics
Edited by Rachel Lauren, B.A. in Business and Political Economy
Learn more about our editorial standards
Ever been in a situation where a buddy or maybe a cousin approached you, eyes full of hope, asking you to play the financial hero in their loan story? Cosigning a loan can be a solid choice to help someone out, but let's get real - it's not just about scribbling your signature and calling it a day. This decision could have a big impact on your financial future.
A cosigner is like your buddy who's got your back when you're a bit short on cash. They're vouching for you, saying, "Yeah, if this dude can't pay up, I got it." They don't get any of the loan money, but they're on the hook if you go MIA.
On the flip side, a co-borrower is in the game with you. They're not just on the sidelines. They're sharing the ball, getting some of the loan money, and yes, they're equally responsible if things go south.
21% of U.S. adults have taken the plunge and cosigned a loan to help out a loved one. But here's the kicker:
Alright, let's talk about something we all secretly care about – our credit scores. Ever wondered how a little signature can send those three-digit numbers soaring or sinking? Let's break it down.
When you cosign, that loan appears on your credit report -everyone checking your credit will see it. If the primary borrower is rock-solid with payments, it's all good news. Your credit report will show timely payments, and you'll look like a responsible adult.
But, if they slack off? It's not just their score that takes a hit. Your credit will suffer too. This can potentially affect your ability to get loans or credit cards.
But here's the twist: the loan amount counts towards your debt even if they're paying on time. So if you're thinking of, say, getting a mortgage or a car loan, lenders will consider this when calculating your debt-to-income ratio. In simpler terms, it could make borrowing more expensive or even out of reach for you.
Now, if you're still thinking, "I'll be the hero, what's the worst that could happen?", let’s get into it. Cosigning isn't just about trust - it's about the nitty-gritty of dollars and cents.
If the main borrower defaults, guess who's getting the call? Yep, you.
Being a cosigner means:
A cosigner release is a beneficial provision offered by some lenders, allowing a cosigner to be removed from a loan. This means that the cosigner is no longer legally obligated to the loan's responsibilities.
For this to happen, the primary borrower usually needs to demonstrate a certain level of financial stability. The criteria for a cosigner release can vary among lenders; typically, they require the primary borrower to make a certain number of on-time payments. This period could range from a year to several years.
When comparing lenders, it's essential to understand their cosigner release policies, as this feature could be a deciding factor for borrowers in choosing their loans.
Here’s a quick cheat sheet of do’s and don’ts to keep in mind when deciding whether to become a cosigner:
Research the loan thoroughly
Discuss terms with the borrower
Monitor the loan payments
Have an exit strategy
Dive in without reading the terms
Assume the borrower understands everything
Forget to check in periodically
Avoid discussing potential problems
When I was signing up for my first credit card, my parents agreed to become co-signers. I was able to use their credit history to get approved for the card in order to build up my own credit.
Here’s why it worked - they trusted me to be responsible about making payments on time so that their score wouldn’t be hurt. Had I failed to do so, our relationship could have been seriously strained.
Deciding to cosign isn't straightforward. Sure, you're helping someone out, possibly giving them a shot they wouldn't have had otherwise. And if everything goes smoothly, you'll earn some serious karma points. But there's another side to this coin. Here's a breakdown of the advantages and disadvantages of becoming a co-signer.
At TuitionHero, we help students and parents navigate college finances easily. We provide top-notch financial guidance and equip you with the necessary knowledge and tools. From tailored private student loans, student loan refinancing, scholarships, and FAFSA assistance, to curated credit card offers, we've got your back.
Individuals may cosign to help a borrower qualify for a loan they otherwise couldn't get, often out of trust or to strengthen a personal bond.
A cosigner guarantees the loan without receiving any funds, while a co-borrower is equally responsible and also receives a portion of the loan money.
Cosigning can build trust and potentially improve credit, but it also carries risks like credit damage, increased debt ratio, and potential relationship strain.
Research the loan, discuss terms with the borrower, monitor payments, and ensure you understand the implications and have an exit strategy.
Being a cosigner can be less stressful if you opt for a loan with a cosigner release. And remember, while cosigning is a big commitment, remember that with TuitionHero, you're never alone on this journey. We're here to ensure that whether you're a borrower, a cosigner, or just someone trying to understand the financial ropes, you're making smart financial choices.
Brian Flaherty
Brian is a graduate of the University of Virginia where he earned a B.A. in Economics. After graduation, Brian spent four years working working at a wealth management firm advising high-net-worth investors and institutions. During his time there, he passed the rigorous Series 65 exam and rose to a high-level strategy position.
Rachel Lauren
Rachel Lauren is the co-founder and COO of Debbie, a tech startup that offers an app to help people pay off their credit card debt for good through rewards and behavioral psychology. She was previously a venture capital investor at BDMI, as well as an equity research analyst at Credit Suisse.
At TuitionHero, we're not just passionate about our work - we take immense pride in it. Our dedicated team of writers diligently follows strict editorial standards, ensuring that every piece of content we publish is accurate, current, and highly valuable. We don't just strive for quality; we aim for excellence.
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