Written by: Josh Smith
Edited by: Lillian Guevara-Castro
Reviewed by: Jon McDonald
Many people believe that cosigning for a loan is a simple process involving the use of a friend or family member’s excellent credit to help someone with poor credit gain approval for loans.
However, the reality is that cosigning encompasses many important details that must be examined by both parties in the application process so that they know the entire extent of benefits, disadvantages, and risks involved.
Read on to learn more about five things to consider when looking for a cosigner — starting with whether you really need one at all. We’ll also explore some other valid concerns, including issues around managing debt, eligibility criteria, how to make your request, and last but not least, creating a backup plan.
1. Do You Really Need a Cosigner?
While you may think you need a cosigner for a particular loan or credit card offer due to your low credit score, bad credit alone doesn’t necessarily mean you need a cosigner’s help to qualify for new credit.
Indeed, many creditors deal specifically with consumers who have bad credit, which can make it not only possible, but fairly simple to find a loan despite having a low credit score. Online lending networks, like those below, can be an easy way to connect with a range of lenders to increase your chances of finding a match.
Of course, there are plenty of times when you will need a cosigner. A recent bankruptcy, for instance, can make it hard to get approved for unsecured credit without a cosigner to vouch for your debt. And the larger the loan you need, the more likely you are to need a cosigner if your credit profile isn’t up to snuff.
If you are looking to buy a car or a home, for instance, and you have a bad credit history, a high debt-to-income ratio, or a low income, you will likely need a cosigner to be approved. Lenders may also require a cosigner based on other factors aside from bad credit, including:
- You are self-employed
- You have an irregular income
- You have no established credit history
- You recently changed jobs
Basically, lenders can ask you to find a cosigner if they can’t determine your credit risk — or have determined that you have a high credit risk.
But don’t run out right away. Simply because one lender requests a cosigner doesn’t mean all lenders will. Depending on the reason the request was made, you may be able to find another lender with more flexible requirements that don’t include finding a cosigner.
2. Can You Responsibly Manage the Debt?
Even if you find that you can’t get the financing you need without a cosigner, you still need to consider whether obtaining a cosigner is a good idea. In other words, if you have any doubt about your ability to handle the debt, you should probably rethink asking someone to cosign your loan or credit card.
That’s because cosigning a loan is a risky proposition for the cosigner. After all, if you weren’t a risk, the lender would have offered you a loan without requiring a cosigner. Essentially, that risk is being passed to the cosigner, as the cosigner is basically agreeing to take financial responsibility for the debt if the primary borrower can’t pay.
What’s more, cosigners are putting their good credit scores at risk. If you can’t handle the debt responsibly — i.e., making the payments on time and as agreed each month — then the cosigner’s credit will be damaged alongside your own credit.
And creditors aren’t stupid. if you fall behind on your cosigned debt, it’s likely going to be your cosigner’s phone being bombarded with collection calls from the lender, because lenders know your cosigner has extra incentive to repay the loan to avoid credit damage.
3. Who May Be Eligible (& Willing) to Be Your Cosigner?
Once you have established that you need a cosigner and that you can manage your debt without ruining your cosigner’s credit, it’s time to seriously consider who to ask to cosign your loan or credit card application. This is a two-stage process; you should consider not only who is eligible to be your cosigner, but also who might actually agree to do so.
As far as eligibility is concerned, only consumers over the age of 18 who have good credit scores and well-established credit histories will typically qualify to cosign a loan or credit card. Your cosigner should also have a large enough income to cover the debt payments in the event this is necessary.
In many cases, finding a willing cosigner will be harder than identifying an eligible one. The reality is that most people will be hesitant to cosign for you, even family members and the closest of friends — and that’s as it should be. In essence, their financial future will rely largely on you, and, in the event that you default, they will be stuck dealing with multiple consequences, none of them pleasant.
Avoid asking distant family or acquaintances to cosign for you. Immediate family members, and perhaps your closest friends, are often the most likely to agree or, at least, to be understanding when they decline.
Undeniably, trust is a powerful element in cosigning. Asking people to cosign for you requires them to trust you, but you also need to trust your cosigner, particularly if they ask you for any personal information, such as your Social Security number or bank account information.
If all of those people decline your request, you will have to begin rethinking the matter of cosigning and perhaps start considering rebuilding your credit through other means.
4. What is the Best Way to Make Your Request?
When you finally determine who to ask to cosign your loan, it’s time to develop a thorough plan. Better yet, put that plan in writing, with a clear outline of your finances, including a realistic budget for repaying the loan.
You then can present your case in a calm, reasonable fashion that indicates maturity and careful consideration, as well as a willingness and ability to responsibly handle the debt.
When presenting your case to the person you are asking to cosign, be open, honest, and direct. Discuss how your attitude toward money and spending has changed, and how you continue to work on becoming a financially responsible person who makes timely payments.
Most importantly, don’t beg, yell, scream, curse, make accusations, or use guilt trips to try to coerce your intended cosigner. These actions won’t help you, and the potential cosigner will likely be well-convinced that getting involved with your finances is a bad idea.
Don’t beg, yell, scream, curse, make accusations, or use guilt trips to try to coerce your intended cosigner.
As mentioned earlier, trust is paramount Cosigners sign up for what could possibly turn out to be a financial disaster for them if you aren’t reliable and trustworthy.
Be candid. About yourself, your life, your mistakes, and your financial mishaps. You may have messed up more times than you can count, but if you believe in yourself, you can change and become responsible, while ultimately not letting your cosigner down. Make a reasonable case that demonstrates how you will repay the loan and shows that you’re capable of taking financial responsibility.
5. Do You Have a Backup Plan?
No matter how well you lay out your case, you may not find a willing (or eligible) cosigner among your friends or family. Don’t despair — and definitely don’t take it out on those who turn you down. Instead, long before you approach anyone at all, make sure you have a backup plan.
In most cases, your credit profile is the reason you need a cosigner in the first place. So, building your credit will likely be the best way to ensure you can get financing without a cosigner in the future. If you have bad or limited credit, a secured credit card, like those below, may be your best bet.
Secured credit cards require a security deposit to open and maintain, which reduces the risk for the credit card issuer. This makes most secured cards fairly easy to obtain regardless of your credit score or history. Be sure to make your payments on time and pay in full each month to build up a positive payment history.
If your need for a cosigner was based on other reasons, such as an irregular income, you can discuss alternative methods of approval with your lender. You may be able to provide additional documentation that can help assuage the lender’s hesitance to approve your application.
Another option may be to provide collateral for the loan. Similar to the security deposit for a secured credit card, using collateral to secure a loan reduces the lender’s risk and can help you get approved despite having a high-risk profile.
Cosigned Debt is a Big Responsibility for Both Parties
Consigning is a huge responsibility that requires a lot of trust. So don’t be surprised is people you ask to be cosigners are hesitant to take on what could be a substantial financial risk they have no control over.
If you have a strong relationship with your prospective cosigner, then that person may be more willing to help you. Conversely, if you default on a loan that someone has cosigned for you, it can potentially ruin your relationship and they may never trust you again.
