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.
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.
Eligibility requirements vary between lenders, but cosigners usually need to meet the following:
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.
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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.
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.
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.
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.
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.
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.
Money can cause a lot of strain on a relationship. Potential cosigners should ask the following questions before cosigning a loan:
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.
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.
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.
Another way to improve your odds is to get a secured loan.
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.
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