A cosigner is an individual who agrees to pay your debt if you fail to repay it. Many lenders accept a personal loan with a cosigner in Canada because it reduces their risk in lending money. In turn, cosigners can help the borrower secure a lower interest rate and better financing conditions. Using a cosigner may seem like a no-brainer, but there are some risks to consider before proceeding.
How do personal loans with cosigners work in Canada?
With cosigner loans, a person who is financially independent from you agrees to pay your debt if you miss a payment or default on the loan. In the eyes of the lender, personal loans with a cosigner are less risky since the lender can collect funds from another person if the primary borrower fails to repay.
The catch is lenders will want the cosigner to have a strong credit score, usually stronger than the primary borrower. During the application process, lenders will assess the cosigner’s finances the same way they assess the primary borrower’s finances.
Often, borrowers seek a cosigner because they are aware they’ll have trouble getting approved on their own. For example, a student with little to no credit history may ask their parents to cosign their student loans. Or, an individual in the processes of rebuilding credit may ask a friend to cosign a personal loan.
What requirements does a cosigner need to meet?
Eligibility requirements vary between lenders, but cosigners usually need to meet the following:
Be the age of majority in their province or territory
Be a Canadian citizen or a permanent resident with a valid Canadian address
Have an established credit history and credit score over 660
Have a debt-to-income ratio under 40%
Have a stable income
Have an active, open bank account in their name
Is financially independent from the primary borrower
Benefits and drawbacks of cosigner loans in Canada
Benefits
Can increase your odds of approval.
Securing a lower interest rate is possible.
Potential for more favourable repayment conditions.
Drawbacks
The loan could affect the cosigner’s credit.
Finding a cosigner you trust and is willing to make the financial commitment can be challenging.
Friendships and family relationships could be strained if you miss payments.
Is it easier to get a personal loan with a cosigner in Canada?
In theory, yes, it is easier to obtain a personal loan with a cosigner. Lenders like cosigners because they have a second person to turn to if they have trouble collecting the debt. However, if the cosigner has bad credit, poor financial history or is otherwise perceived to be a risky borrower, your chances of getting approved won’t increase.
On the other hand, if the cosigner is perceived to be an excellent candidate for lending, they may eliminate part of the risk for the lender. The reduced risk can lead to better odds of approval, more favourable conditions and even a better interest rate.
How to apply for cosigner loans in Canada
Compare your options. Start by comparing different lenders and financial products. For every loan you come across, be sure that cosigners are accepted.
Prepare documentation. In most cases, the primary borrower and the cosigner must provide the required documents to the lender. Government identification, proof of income and employment information are common requests. Be proactive in gathering this information from the cosigner to make the application process smoother.
Apply for financing. Now, you’re ready to finalize your loan application online or in person. If the cosigner is available, consider having them there with you when you apply in case additional information is required.
No. A cosigner is a close personal contact, like a friend or family member, who is willing to manage your loan repayments on your behalf if you ever find yourself unable to pay them. You can’t find an unknown cosigner online in Canada because there are lots of risk and no benefits to cosigning a loan.
Is a cosigner different from a guarantor?
In practice, the terms “cosigner” and “guarantor” are often used interchangeably. A cosigner and guarantor do not receive any benefit from the loan but will be obligated to pay the full amount if the primary borrower defaults on payment.
Is a cosigner different from a joint applicant?
Yes, the two terms are different. A joint applicant, sometimes referred to as a co-borrower, is a borrower who applies for a loan alongside another borrower equally. All joint applicants share the burden and the benefits of the debt equally.
What a cosigner means for different types of personal loans
As a cosigner, you only assume the liability of the loan and none of the loan’s benefits. If you want to assume the benefits of the loan too, you should be applying as joint applicants instead. The type of loan the primary borrower is seeking will affect the cosigner. In general, there are two main loan types: secured and unsecured. Consider the implications of each below.
Secured loan
A loan that has collateral attached to it is a secured loan. A home, car or any asset with significant value could be used as collateral. Mortgages and car loans are common loans under this category. Secured loans are generally safer because the lender has an asset to seize if the borrower stops making payments or defaults.
With any loan, cosigners only assume the liability, but none of the benefits. This means if the primary borrower obtains a mortgage, car loan or other secured loan, the cosigner does not own or possess any benefits of the purchased asset or collateral. The cosigner is simply responsible for repaying the debt if the borrower fails to pay or defaults. Keep in mind that secured loans are actually safer for cosigners because the lender may repossess the collateral instead of turning to the cosigner if the borrower fails to repay or defaults.
Unsecured loan
A loan with no collateral is an unsecured loan. These loans are perceived as riskier because the lender has nothing to seize if the borrower fails to pay or defaults. In addition, it’s more risk to the cosigner because there’s a greater chance that they will have to repay the loan in the worst-case scenario.
Similarly to secured loans, the cosigner does not reap any benefits from an unsecured loan. The cosigner only assumes the obligation to pay the debt. That means if the borrower used the loan to go to school or make improvements to their home, the cosigner has no ownership or rights to the products or services bought by the borrower.
4 important questions to ask before becoming a cosigner
Money can cause a lot of strain on a relationship. Potential cosigners should ask the following questions before cosigning a loan:
Am I ready to accept the responsibility? A potential cosigner should fully understand the implications of guaranteeing a loan. If they’re not comfortable with the responsibility, it’s best to withdraw support.
Do I need to seek legal advice before cosigning? Some lenders may require a potential cosigner to seek independent legal advice first, especially for high loan amounts.
What is the loan for? A potential cosigner will want assurance that the loan is for something reasonable and responsible.
How much is the loan amount? A small amount is easier to repay than a large amount. A lower amount is more attractive to a cosigner because default is less likely. Even if default occurs, less money is required from the cosigner to settle the debt.
Can I get a bank personal loan with bad credit and a cosigner?
If you have bad credit, it’s unlikely you’ll get approved for a bank personal loan even if you have a cosigner with a strong financial profile. Banks have strict requirements. To get approved as the primary borrower, you’ll need to be considered as acceptable risk on your own.
If you have bad credit, alternative lenders are a viable option.
I have no credit. Can I get a personal loan with no cosigner?
If you’re looking for a personal loan and you have no credit and no cosigner, you can apply to alternative lenders that will shift their focus on other factors, such as your income and debt-to-income ratio. Learn more about getting a loan with no credit history.
How do I get a personal loan with bad credit and no cosigner?
If you have bad credit and no cosigner, there are alternative lenders in the Canada that specialize in personal loans for bad credit. However, they charge higher rates to offset the risk of borrowers without cosigners defaulting. To increase your chances of approval, you’ll need to show that your income can manage the loan repayments by providing recent bank statements and pay stubs. You also must have little to no NSF transactions in your bank account in the last 60-90 days or any active short-term loans.
Cosigners can help primary borrowers secure financing with better conditions and rates than if the borrower applied alone. This is especially true if the cosigner has great credit and an ideal financial position. However, as the risk for the lender decreases, the risk for the cosigner increases. The cosigner assumes a large financial responsibility when cosigning a loan – a decision that shouldn’t be taken lightly.
Frequently asked questions about personal loans with cosigners in Canada
A cosigner may increase your odds of approval, but it’s not guaranteed. A lender will look at both of your finances and even if your cosigner’s profile is strong, it can still deny you a loan if it determines that your personal financial situation is not acceptable risk.
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.
No, there are no cosigner services in Canada where you can hire or pay an unknown person to cosign a loan with you. Cosigners are usually close friends or family members.
Veronica Ott was a writer at Finder. She's written for numerous finance and business websites including Loans Canada, Borrowell and Fresh Start Finance. She previously worked as a professional chartered accountant in the private equity and advertising industries.
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