Cosigning can help those with bad credit get a loan.
Having trouble getting a personal loan on your own? When bad credit or no credit is keeping you from your financial goals, a cosigner could help your chances.
A cosigner is someone who agrees to take responsibility for the loan if you miss a payment or default on your loan. Cosigning for a personal loan is an act of kindness that can help a family member or friend access funds they might not otherwise be able to qualify for on their own. It’s also important to know that cosigning comes with its own risks.
What is a cosigner and how does it work?
A cosigner is typically brought on if the primary borrower has bad credit, a history of bankruptcy, no borrowing history, or an income amount that would make it difficult to make payments on the loan. When a cosigner brings additional income and a sufficient credit score to the table, it increases the odds that a lender will approve the loan.
To cosign on a personal loan, the cosigner needs to have established credit – typically fair or good credit. Basically, a cosigner can help a borrower with no credit or bad credit get approved for a personal loan. When the cosigner adds their name and credit score to the loan application, the borrower is more likely to get approved.
Who can be a cosigner?
Anyone over the age of 18 can be a cosigner, as long as they have good credit and are willing to cosign your application. Their information is vetted in the same way that any loan application is reviewed, and with things like income and past payment history taken into consideration.
What are the risks of becoming a cosigner?
A cosigner makes an agreement to pay off the debt of the person they cosign for if the borrower stops making payments or is unable to make payments at any point during the loan repayment process. Cosigning differs from signing as a co-applicant – cosigners do not receive access to loan funds.
The risk is in the potential financial responsibility for the loan repayment if the borrower defaults. In addition to repaying the loan funds, the cosigner may also be responsible for things like interest, late fees, and collection fees should this happen. This can also mean credit damage for the cosigner, with missed or late payments being assigned to the cosigner’s credit report, and possible legal action.
What are the benefits of cosigning?
As you can see, cosigning is worth serious consideration—but it’s not without a few benefits to you as a cosigner.
- Add to your payment history. In addition to helping your loved one access the funds they need, cosigning can actually help you build your credit. When payments on the cosigned loan are made on time, that is reflected on your credit report, adding to your positive payment history.
- Diversify your credit mix. Installment loans, like those offered by World, show up on your credit report as a different kind of borrowing than revolving accounts, like credit cards. A mix of different credit types can positively impact your credit score over time.
The decision to get a cosigner is a big one. Getting informed about the risks and benefits is a smart way to start exploring possibilities – whether you’re considering asking someone to cosign a loan or considering becoming a cosigner. By understanding the implications and responsibilities of cosigning, you’re setting everyone – including yourself – up for financial success in the long term.