What is a Cosigner and When Do You Need One?

What is a Cosigner and When Do You Need One?
  • Opening Intro -

    With a cosigner unlocking more lending options than you would on your own, doubling up on your application may sound appealing.

    But is it always the right option for your finances?

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If your request for a personal line of credit (or LoC) has been denied, a cosigner may be a way around your rejection. A cosigned LoC lets you use someone else’s financial standing to guarantee your contract.

Sound too good to be true? What is a cosigner, anyways, and how does a personal line of credit work with or without one?

Find the answers to these questions and more below.

What is a Cosigner?

Think of them as a financial pinch hitter for your LoC. They’re sitting on the bench until you need their help. If something makes it impossible for your pay off your LoC, they’ll be responsible for making these payments in your place.

This kind of guarantee may give a significant boost to your application.  

What Financial Profile Do They Need?

For this person to make a difference to your chances, they need the following two things:

  • Good credit score
  • A solid income

A good score means they’ve handled their debts well in the past. The higher their score is, the less risk they pose to your financial institution — and the bigger the boost they give to your application.

A solid income suggests they should have enough money on hand to cover your payments if you can’t. The more money they make, the better.

What Does a Cosigner Do for a Loan or Line of Credit?

Your cosigner won’t change the building blocks of your LoC. You’ll still receive a personal line of credit limit that you may use and pay off on a repeating basis until you close the account.

What changes are:

  • How you apply
  • The limits, terms, rates, and conditions you qualify for
  • What happens if you miss a payment

Is it the Right Option for You?

If you’ve been denied funding because of your income or credit score, a cosigner may be a fantastic way to overcome these barriers. But you’ll have to ask yourself the following questions:

  • Does your financial institution offer cosigned options? Not all of them do.
  • Does your loved one have a positive score and a stable income?
  • Do they want to take on the risk of signing their name?

This last one may be the hardest to swallow. It’s difficult to hear friends or family say no when you ask them for help. Ultimately, you have to understand how your LoC may impact their finances. Not only will they be responsible for paying it if you can’t, but they may also see your payment history impact their credit.

Even if they say yes, a cosigned LoC can be challenging. Twenty-six percent of cosigners say the experience did damage to their relationship.

other valuable tips:

Do you think your relationship can handle the added pressure of cosigning a personal line of credit? Then this may be a great option when you’re denied financing. But don’t rush into things. Explore your other options to see if you can qualify for another LoC with different rates.

When asking someone for help, honesty is the best policy. Be transparent about why you need the LOC and why you need their help. And most importantly, come up with a plan that shows them how you intend to pay your bills on time, so they won’t have to cough up any cash!

Image Credit: need cosigner by Pixabay

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Consumer Tips reference:

GUIDE: establishing credit

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Categories: Consumer Financing

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