Consumer Credit: What Is A Co-Signer?

Learn about the role and responsibilities of a loan co-signer.

A co-signer is someone who accepts responsibility for repayment of credit or a loan along with the primary borrower. A co-signer may also be called a guarantor, a co-borrower or co-applicant.

Why is a co-signer needed?

Generally, a co-signer is required on a loan when the primary borrower has inadequate resources or credit history to secure the loan alone. For example, lender may require a young borrower without a credit repayment history to have a co-signer since there is not enough data to predict this borrower's payment patterns. Or if a borrower has a history of late payments or inadequate income for the amount of money being borrowed, a lender may ask for a co-signer on the loan. In some instances a co-signer's good credit history can improve the terms of the loan, for example by reducing the interest rate on the loan.

Often, if the purchase is not immediately necessary, the borrower can simply wait for a while, establishing or improving credit until a co-signer is no longer needed.

What are the co-signer's obligations?

A co-signer takes on the full legal obligations of the loan, along with the primary borrower. If the primary borrower does not make the required loan payments, the lender will ask the co-signer to make them. The co-signer can be held accountable for the entire amount of the loan under the terms of the contract, in the same way as the primary borrower.

A co-signed loan will appear on the co-signer's credit history and report as well as on that of the primary borrower. Since a co-signed loan is factored into the co-signer's debt-to-income ration, it could affect the co-signer's ability to secure a future loan.

When is it not wise to be a co-signer?

It is important to consider co-signing a loan very carefully before agreeing to it since it is a legal obligation. Generally, one should only co-sign a loan for a trusted loved one. Co-signing a loan for someone less closely related can be difficult. Before co-signing a loan, the guarantor should consider what will happen if the primary borrower fails to make a payment. Will the co-signer be able to cover the payments easily? Will the co-signer be able to locate the primary borrower? Many people have co-signed loans for friends, acquaintances and distant relatives only to end up with large financial responsibility and little recourse. And, consider why they need a co-signer in the first place. If they have poor credit history, what is the likelihood their payment patterns will change now?

Some financial experts recommend that people never co-sign loans, except for assisting their children when they are first establishing credit.

Is it possible to stop being a co-signer?

Generally a co-signer is on the loan for the duration of the term. It is not possible to get out of the contract simply because you have concerns about the financial obligations. However, a few lenders will release a co-signer after the primary borrower has made a substantial number of on-time payments. Each loan contract is different and should be reviewed carefully for specific terms relating to the co-signer.

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