Co-sign a loan – Everything You Know

Jul 13th, 2022

Taking a loan can be more complex than you imagine. The term ‘Co-signing a loan’ becomes relatable when a person has a bad or no credit history. Basically, the co-signer acts as human collateral and will repay the loan if the primary borrower is unable to pay it back. If you are expected to co-sign a loan or you need a co-signer, here is everything you should know ahead of time. 

 Co-sign a loan
Co-sign a loan

What Does it Mean to Co-Sign a Loan?

When you co-sign a loan, you pledge to pay off the loan if the main borrower is unable to pay back the loan. Basically, a co-signer becomes important when the main borrower requesting the loan doesn’t have substantial credit history, income, or reliability to obtain the loan on his own. 

For instance, people who have a record of defaulting on loan repayments likely would not be given loans. Also, lenders will likely reject people who are yet to build reliable credit history. Hence, this set of people will need co-signers to increase their chances of getting a loan. 

What is a co-signer?

Basically, a co-signer is a person who includes their name on the main borrower’s loan application. Doing this means that they agree to be lawfully responsible for repaying the loan amount, and any extra fees, in case the borrower is unable to pay. Essentially, people need co-signers because they can not obtain the loan by themselves. 


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Should I co-sign a loan?

It is very common for parents to co-sign loans for their kids who are yet to build a solid credit history, however, your friends and relatives may come to you. No matter who wants you to assist them with co-signing, it is a very delicate decision you need to weigh carefully. You have to trust the borrower and be confident in his or her capacity to pay back the loan. Also, when a person asks you to co-sign a loan, be sure of your financial capacity too, in case something goes wrong along the line. 

What are the requirements to co-sign a loan?

To qualify for co-signing, you need to have a strong credit score first. Here’s what co-signing means for your financial situation: 

1. Make sure you can afford to repay the debt if the primary borrower defaults. If repaying the loan would hurt you financially, it is better not to co-sign the loan.

2. Do copies of all the paperwork of the loan, and ensure that you fully understand the terms before agreeing. Most times, the responsibility of a co-signer differs, so you will need the full details of what the lenders expect from you. 

3. Consider the impact co-signing a loan will have on your credit score. Know that this loan will reflect on your credit report. Hence, if you plan to obtain a loan yourself in the future, you may reconsider co-signing the loan. 

Should I ask someone to co-sign my loan?

If you find yourself in need of a co-signer, you need to carefully consider your options. This is a signal that you may need to reconsider the loan. It is better to save enough money to purchase what you need without a loan. Also, you should take active steps to fix any problems you may have on your credit report that stopped your approval.

However, if you really need the loan, using a co-signer is a good option. In this case, you need to find a co-signer who is financially responsible. If you are unable to pay back the loan, that person will repay on your behalf. However, if they do not take up the responsibility, you have to pay back yourself. 

Bottom Line

When you help to co-sign a loan, you stand in for a person taking out a loan. Basically, this implies that you bear the financial burden of repaying the loan if the borrower defaults. Hence, co-signing can affect your finances in more ways than you can imagine. So, you should think it through before taking the bold step. In essence, ensure that you are financially capable before co-signing and do not co-sign unless you trust the borrower. 

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