A co-signer is a person (parent, grandparent, close family member or friend) who signs a loan with you when your credit score is not high enough, you have not had time to build a credit history and/or your income is not high enough to qualify for the loan payment. A co-signer promises to repay a loan if you default on the payment before repaying the entire loan. Close to 90% of student loans are co-signed in America. Co-signing is also used for mortgages when young people are starting out and have not had time to establish their credit, personal loans and auto loans are also typical times for co-signing. The biggest advantage to the person receiving the co-signed loan is building their credit score.
Disclaimer for Co-signers
If the person asking for co-signing help is not financially responsible, this loan will become the full responsibility of the co-signer. We highly recommend the person co-signing any loan consider this loan their full responsibility and treat all future financial budget planning that this loan will be part of their monthly expense at some point. A co-signed loan will show up on your credit report and will affect your future borrowing ability.
Why Would I Need A Co-signer?
A lender would ask you for a co-signer if you do not qualify for a loan based on your credit score, usage and income
- Credit - if you have not repaid loans in the past or have a history of late payments, lenders will see you as a credit risk. Each lender's requirements vary, but the general rule is that if your score is below 500 you may require a co-signer
- Income - this includes a debt-to-income ratio below 30%. Lenders look very closely at your annual earnings to decide if you have the ability to repay the loan and still have enough to live on. If they think you are taking on too big of a loan for your lifestyle and finances, they may ask you to get a co-signer
- If you have just graduated from high school or college and have not had the time to build up your creditworthiness, the lender may require you to get a co-signer.
- You live in a state whose lending regulations(usury laws)do not allow lenders that charge high interest to originate loans there. These regulations apply to Pay Day lenders whose high-interest rates harm those with already low credit scores.
- You are going through a divorce and require a co-signer to purchase the home from your ex-partner