What is a cosigner?
A cosigner is a person who agrees to take legal responsibility for a loan if the primary borrower defaults. Adding a cosigner can result in better approval odds if the cosigner has strong credit. It can also help the primary borrower qualify for a lower interest rate.
However, the cosigner has a legal responsibility to make payments if the borrower fails to pay or defaults on the loan. If this happens, the lender can take legal action against the cosigner to collect on the debt. Late or missed payments can negatively affect the cosigner’s credit.
Despite the cosigner’s responsibility for the debt, they don’t have direct access to the loan funds. Cosigners don’t have ownership if you use the loan to purchase assets. For example, if you use a personal loan to purchase a boat and add a cosigner, the other person won’t share boat ownership.
Cosigner vs. co-borrower
A cosigner or a co-borrower could improve your approval odds if they have stronger credit than you. Cosigners are responsible for the loan only if you fail to pay, while co-borrowers are responsible from the time the loan is funded.
Cosigners don’t have access to loan funds or ownership rights, but co-borrowers do. Cosigners serve as a backup for the primary borrower, while a co-borrower has an equal role in loan responsibility and access.
How do personal loans with cosigners work?
You can get a personal loan with a cosigner by adding them to the loan application. During the application process, the lender evaluates the creditworthiness and finances of the borrower and the cosigner.
The lender uses its findings to set loan rates and terms. If the cosigner has stronger credit and finances than the borrower, the lender might offer a lower interest rate and more favorable loan terms.
Potential risks of adding a cosigner
Adding a cosigner can create financial and legal burdens. The risk isn’t an issue if you keep up with your loan payments, but falling behind might create problems.
In addition to potential damage to the cosigner’s credit, there might also be legal consequences if you fail to make payments on your personal loan. For example, the lender might garnish the cosigner’s wages. This can also hurt your relationship with the cosigner.
