What Is A Cosigner?

A co-signer is an individual who works with another individual in order to facilitate a loan which the second individual wishes to take out. In simple terms, the co-signer will sign a contract under the terms of which they agree to pay off the debt being incurred if the person borrowing the money is unable to meet the payments. In this way, the co-signer guarantees the loan when they sign the loan application and, in most cases, makes it possible for the borrower to access credit.

Why might you need a cosigner? 

For many people, borrowing money and accessing a line of credit is trickier than it needs to be because they have a poor credit report. This could be because they have borrowed money in the past and defaulted on payments, or in many cases, simply because they have never needed to access credit and have therefore not been able to build a solid credit rating.

In the case of a business loan, many people will be unable to access credit because the business in question is still a start-up. This means they have not yet had the time and cash flow needed to demonstrate the viability of the business. At the same time, the earliest days of a business, before income streams begin to flow freely, are often those times when the business is most likely to need to access credit, which is why the help of a co-signer can be extremely helpful.

Who is likely to be a co-signer?

In most cases a co-signer will be someone close to the lender, such as a friend or family member. The presence of a co-signer represents a kind of back-up plan or safety net for the lender. The co-signer will have been chosen not just because they are willing to guarantee the loan but also because they have a very strong track record and credit history. A lender will be far more likely to approve the loan if there are two people with responsibility for paying the money back, and also if the co-signer is the kind of individual they would usually be happy to lend money to. 

The details of loans with a co-signer

In the first instance, a loan is far more likely to be approved if a co-signer is willing to sign the application. In addition to this, the lender might also offer better terms for the loan thanks to the presence of the co-signer. These could include the following:

• Lower fees

• A lower interest rate

• More flexible payment terms.

The co-signer will need to be made fully aware of the fact that both the borrower and the co-signer will be pursued for repayment if the payments are defaulted, and that both parties are equally responsible for repaying the full amount of the loan. The ideal co-signer will be someone who has borrowed money in the past and has a track record of repaying those loans on time. If either of the people applying for the loan is currently experiencing problems paying back money that they have borrowed, then the loan is far less likely to be approved.   

Other factors which the lender will be looking at, in addition to the credit rating of each of the signatories, will include the income streams of both borrowers and how much of the income each month is taken up with paying off existing debts.  

We can help

If you’re interested in finding out more about co-signing, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.