However, cosigning a loan comes with several risks. The cosigner is legally responsible for the debt if the primary borrower can't make payments. Any late or missed payments can negatively impact both parties' credit scores. Furthermore, the cosigner doesn't have any ownership of the vehicle.
Acting as a co-signer can have serious financial consequences. First, co-signers assume legal responsibility for a debt. So, if the primary borrower is unable to pay as agreed, the co-signer may have to pay the full amount of what's owed. Second, a co-signed loan will appear on the co-signer's credit reports.
Co-signing a credit card for a friend or family member is a big leap to take and one that could hurt your credit score if the person you sign with doesn't pay the card payments on time.
Benefits of co-signing a loan
When someone has a thin credit history or is rebuilding their credit, having a co-signer with a good score and an established credit history is powerful. Not all personal loan lenders allow co-signers, so it's worth checking before you apply.
Having a co-signer on the loan will help the primary borrower build their credit score (as long as they continue to make on-time payments). It could also help the co-signer build their credit score and credit history, if the primary borrower makes on-time payments throughout the course of the loan.
Each lender has its own criteria and process for removing cosigners, and some don't even allow it. So the best place to start is to contact your lender to find out your options. They may include: Co-signer release: An agreement to release the cosigner's liability after a certain number of payments are made.
Common cosigner requirements
Typically, your cosigner should have: Good-to-excellent credit: Your cosigner is your backer, so it makes sense that they should have strong credit. An excellent credit score is best, but try to aim for at least good credit or above (so a score of 670 or higher).
Co-signing for someone else could affect you significantly in any future loans you may apply for. Lenders refer to this situation as someone having too much credit and is often used as a reason to deny a loan application. Once you sign as a co-signer, there's no turning back.
Offer a Loan From Your Savings
Instead of cosigning, you could offer to lend your loved one money from your savings. Choose an amount that you're comfortable with lending, agree on a repayment term with the borrower and formalize a contract.
The bottom line
Having a co-signer on your auto loan application can make the approval process easier. You will often land more favorable loan terms and more affordable monthly payments. A co-signer can be particularly helpful if you're just beginning to build a credit profile or if your credit score needs improvement.
In short, you can cosign a mortgage without creating any impact on your personal taxes, though there is a risk to your credit and personal expenses.
The lender may take legal action against you, pursue you through debt collection agencies, or sell the debt to a “debt buyer” to try to collect the money that is owed on the loan if the borrower does not pay or defaults on his or her repayment obligations.
Normally, a cosigner will have to stay on the mortgage for a minimum of one year. From my experience, normally a cosigner will stay on a mortgage for several years. When the borrower is ready to have the cosigner removed, they contact the lender to then re-qualify without the cosigner.
Cosigning a loan doesn't give you any title, ownership, or other rights to the property the loan is paying for. Your only role is to repay the loan if the main borrower falls behind on the payments or defaults.
Co-signing for someone else can impact your ability to get approved for a mortgage because it expands your financial obligation. The co-signed loan becomes part of your overall debt load, increasing your debt-to-income ratio (DTI).
At the end of the day, while the idea of cosigning a loan sounds loving to those we are doing it for, God's Word reminds us time and time again in the book of Proverbs that this is an unwise way to manage our finances.
You don't need to explain yourself to anyone when someone asks you for a favor. Just say, “no" as politely as you can. If they ask why, you can certainly tell them it's none of their business. If you want to give an explanation, you can simply say that you do not take personal risks with your money.
Similar to a home loan, you can be a cosigner for an auto loan. However, being a cosigner doesn't give you rights to the car that loan will purchase. A cosigner doesn't have any legal rights to the vehicle, so they can't take the car from its rightful owner, the primary borrower.
Each auto lender has its own credit requirements, but typically a cosigner needs a credit score of 670 or more.
Requirements for a $20,000 Personal Loan
Requirements vary by lender, but most lenders require borrowers to have a credit score in the good to excellent range — meaning a score of at least 670.
A co-signer can also help you improve your credit score if it is low due to past financial missteps. Payment history accounts for 35 percent of your credit score, so keeping current on the auto loan payments over the loan term could help boost your score — assuming you manage all other debts responsibly.
Key takeaways. If the person you co-signed your loan with dies, it is important to keep up with your loan payments to avoid the risk of default. No matter whether the deceased was the co-signer or primary borrower, you will become the sole person responsible loan payments.
There's no definitive answer about whether co-signing a lease is right or wrong for you. It depends on your finances, relationship with the tenant, what you could afford to spend if the tenant doesn't pay, and how responsible the tenant is.
Additionally, the co-signer may need to pay attorney fees if legal action is required. Lenders can garnish the wages of co-signers.