Getting your first car or starting university can be incredibly exciting, but it can also be extremely frustrating if you don’t have much of a credit history. If you can’t afford to make a big purchase outright and your credit is nonexistent or less-than-perfect, you may be considering taking out a loan with a cosigner.
Some of the roadblocks to getting a personal loan can be made more manageable with the addition of a cosigner. You can meet minimum requirements, while also potentially getting more competitive interest rates.
Find out more about how cosigner loans work in our guide below. Learn about the benefits and drawbacks and how to apply for a loan online.
How does getting a personal loan with a cosigner work?
Simply put, a cosigner is someone who agrees to pay back your loan if you miss payments or default on it. Rather than relying on your credit history and score alone, creditors can take your cosigner’s financial history into account.
The addition of a cosigner reduces risk for lenders, as long as your cosigner has a strong credit history. Since a cosigner is intended to act as a guarantee against loss, lenders will consider your cosigner’s finances just as thoroughly as they investigate yours.
How does a cosigner differ from a guarantor?
Guarantor is a term you more often see associated with apartments or rentals, where only the primary applicant is living at the residence. It can be applied to loans as well.
Cosigners and guarantors differ, however. Cosigners are just as liable as you are for the loan from the get-go, whereas a guarantor is liable only after you default on the loan.
Is a cosigner different from a joint application?
In some cases, yes. The two are similar in that both put the responsibility on the person who is applying with you. Joint applicants and cosigners are both fully liable for the loan on issue — the same as the borrower.
However, the two differ in that “joint” implies a level of ownership by the co-applicant over the disbursed funds and what’s purchased with it.
Is it easier to get a loan with a cosigner?
It depends. The reason a cosigner can be effective is that they minimize risk for the lender. If your cosigner doesn’t minimize risk — if they have a poor credit score or a bad financial history — they may not make the approval process any easier.
On the other hand, if they have excellent or good credit, they may eliminate some of the risk for the lender. That reduction of risk can then potentially increase the odds of you being accepted for a loan and even get you a better rate than you would’ve been offered otherwise.
While eligibility requirements vary between lenders, they usually include:
Must be 18 years of age, or the age of majority in your province or territory
Be a Canadian citizen or a permanent resident with a valid Canadian address
Must have an established credit history
Must demonstrate an ability to repay the loan through having a regular income
Have a working bank account
Meet any income requirements
How to apply for a loan with a cosigner
Compare your options. You can start by comparing different lenders. Be sure that the loan type you’re interested in applying for is eligible for cosigners.
Prepare your financial documents. Both you and your cosigner should have the documents required by the lender. These can include paycheques, bank statements and employment information.
Apply together online. If the person who’s agreed to be your cosigner is available, consider having them there with you when you apply online. It can likely make the application process smoother, in case any specific questions are asked that you’re unsure of.
3 important questions to help make this a smart choice
Cosigning a loan is a big responsibility. If you don’t make your payments or default, your cosigner is on the hook for paying back what you borrowed. Unpaid debt can cause strain on a relationship. So before you borrow, be sure to ask some important questions about your financial situation and ability to repay the loan.
What is the loan for? Your cosigner will likely want to know why you’re taking out a loan. Financing a vacation is much different than consolidating your debt, and you’ll need to be clear with your cosigner before you apply.
How much are you borrowing? A small loan is easier to repay than a large loan. A lower amount is more attractive to a cosigner because you’re less likely to face default and if you do, they’ll be on the hook for less money.
How often will repayments need to be made? Knowing how often you’ll need to pay down your debt is important. Most lenders require monthly payments and give you the option to make additional payments at no cost. This can impact your cosigner since they’ll have to pay if you don’t, so be sure you can make regular repayments.
What a cosigner means for different loan types
Different loan types attract different meanings for cosigners when it comes to what you’re financing.
Implication for personal loans
When a person cosigns with you for a personal loan, they assume liability for the loan but aren’t entitled to any of the funds.
Implication for auto loans
The benefits as a cosigner for an auto loan are limited. If they’re not listed on the title, they don’t have any ownership. Being listed on the title takes the individual from cosigner to joint applicant.
Implication for student loans
Cosigners are common on student loans because parents often agree to be legally responsible for their child’s loan payments. Since young students may not have established credit history, a parent cosigner can help them borrow the amount they need to pay for school and get competitive rates and favourable terms.
Implication for mortgages
Like an auto loan, unless the cosigner is listed on the property title, they aren’t a co-owner of the property. Should you default on your mortgage, the property is security for the loan. The cosigner isn’t transferred any type of ownership.
Implication for business loans
For business loans — especially for riskier businesses — cosigners may be asked to provide collateral. Even in this case, the cosigner doesn’t hold any ownership of the business due to the loan.
Benefits and drawbacks of applying with a cosigner
Potentially increases your chances of approval.
Could make you eligible for lower interest rates.
Potential to get more favourable repayment terms.
The loan could affect your cosigner’s credit.
Double information is required since two people’s eligibility needs to be assessed.
Could strain the relationship with your cosigner if you default.
If your cosigner’s credit is bad, you could still be rejected.
There are attractive benefits when it comes to applying for a loan with a cosigner. Finding a lender that meets your needs and allows cosigners can potentially result in easier acceptance and a better interest rate.
It’s important for both you and your cosigner to know your credit scores before applying. This can help you quickly narrow down your options to loans you could qualify for and help you understand what rates you’re likely to get.
Frequently asked questions about cosigners
You may be able to negotiate with a lender that accepts cosigners to make your cosigner a guarantor. The process of doing so works by adding a section to the terms that identifies the cosigner as liable only if you default on the loan.
You can research services that match borrowers with cosigners. You might also be able to consider extended family and friends of friends, although keep in mind that any late payments could affect their credit history as well as yours.
Depending on the lender, your cosigner may be able to pay on your behalf. You might want to check with the provider ahead of time if you think this could be an issue.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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