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What Is a Co-signer?

A man drives a car while a woman sits in the passenger seat and considers becoming a co-signer

Key takeaways:

  • Borrowers may ask a person they trust to co-sign a loan due to low credit scores or a lack of credit history.
  • When a person applies for a loan, they may have an option to add a co-signer or a co-borrower.
  • If a primary borrower defaults on their loan payment and the co-signer doesn’t pick up the slack, it could negatively impact the co-signer’s credit score.

If you have a low credit score or no credit at all, finding a lender that’ll approve you for a loan may be tough. However, adding a co-signer to your personal loan may help. 

A co-signer is a person with good credit that agrees to repay your debt if you default on a loan.

Asking someone to be your co-signer shouldn’t be taken lightly. By agreeing to co-sign your loan, they take on all the rights and responsibilities of a loan along with you, the borrower. If you miss a payment or default, you may damage their credit. 

Before you ask someone to co-sign, learn about what a co-signer is, how it works, and their rights, so you can properly inform them.

Co-signer meaning

A co-signer is someone that applies for a loan with another person and legally agrees to take responsibility for payments if the primary borrower is unable to. Co-signers may be a trusted friend or family member that has a decent credit score and steady income. 

They can be used for a variety of loan types including auto, home, personal, debt consolidation, and auto refinance loans. Having a co-signer can possibly help a borrower qualify for a loan with more favorable terms than they may otherwise be eligible for.

Co-signer vs. co-borrower

If you need a little extra help qualifying for a loan with favorable terms, you can get help from two types of parties: a co-signer or a co-borrower. Both of these backups would be legally responsible for the debt you take out. 

The biggest difference between a co-borrower and co-signer is the amount of investment each has in the loan. 

A co-borrower has more responsibility and ownership than a co-signer because a co-borrower’s name is on the loan, and they’re expected to make payments. You can see some of the key similarities and differences between them in the table below:

Co-signer Co-borrower
Has no ownership of the property that the funds are for Are on the title and have some claim to the property that the funds are for
Is legally obligated to repay the loan if the primary borrower defaults Splits the repayment obligation equally with the primary signer
Must have their income, assets, credit score, and debt-to-income ratio considered in the application Must have their income, assets, credit score, and debt-to-income ratio considered in the application

 

What is a co-signer responsible for?

If you’re thinking about asking someone to co-sign a loan with you or becoming a co-signer yourself, you need to understand what responsibilities a co-signer has.

Paying back debt

Financial responsibility is an important duty a co-signer can have. Even though the primary borrower should be making the monthly loan payments, that doesn’t mean they will. 

If the borrower defaults, the co-signer is legally obligated to pay whatever the borrower has missed. Depending on how many payments a borrower misses, a co-signer may also owe penalties, late fees, and extra interest.

Gather the right information to apply

Lenders commonly use credit scores and history to see if the people who are applying for a loan are financially reliable and responsible. To show they can be trusted, a co-signer needs to gather and submit several key pieces of information and documentation to qualify. Some of these details include:

  • Credit history
  • Credit score
  • Income
  • Debts
  • Employment 

Co-signer rights

When a person co-signs a loan, credit card, or rental agreement, they take on a legal obligation to make payments if the primary borrower can’t or doesn’t follow through. Before committing to a loan application, consider what rights a co-signer is entitled to.

  • Property ownership: Being a co-signer doesn’t entitle a person to anything that the loan funds are being used for.
  • Collections: When a person becomes a co-signer, they’re responsible for any loan amount left unpaid, which means they could face collections. According to the Federal Trade Commission, a co-signer may be contacted by collections for the loan amount before the primary borrower.
  • Loan name removal: Depending on the lender being used, primary borrowers can release a co-signer from a loan with a co-signer release form. In addition to the release form, the primary borrower must show that they’re able to handle the payments.

Does being a co-signer affect your credit?

Becoming a co-signer may impact a person’s credit score slightly, especially if the loan provider performs a hard credit inquiry. A hard credit inquiry will appear on a co-signer’s credit report and may lower their score slightly.

Any debt that a co-signer takes on will also appear on their credit report, along with any issues associated with it. These issues include any late payments, defaults, and missed payments sent to collections. 

If a co-signer doesn’t pick up the slack before the missed payments are sent to collections, they’ll appear as a missed or default on the co-signer’s credit report. That’ll likely cause the co-signer’s credit score to drop. 

Co-signers: the bottom line

Deciding to become a co-signer is a big financial decision, it’s not something that should be done impulsively. Becoming a co-signer may impact a person’s credit score and their financial situation for many years. 

Before you ask someone to be a co-signer or decide to become one, consider the full scope of the liabilities and risks.

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* When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information will be reported to the credit bureaus.

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