Helping out loved ones in a time of need is certainly a noble endeavour. However, cosigning a loan is one of those favours that requires a great deal of judgment and vigilance. 

Why do you need a cosigner? 

If a financial institution requires a cosigner, it is generally because the borrower does not meet the lender’s criteria on their own, including requirements related to income, credit or borrowing capacity.

In the first case, it may be because of a poor or limites credit history. 

In some cases, adding a cosigner allows the lender to consider that person’s income and financial situation when assessing the application. Requirements vary depending on the lender and the borrower’s situation.

By becoming a cosigner, you become responsible for the debt alongside the borrower. By taking on the same obligations as the main borrower, you are significantly lowering the risk for the lender. You remain responsible for repaying the debt even if you have an agreement with the main borrower that they will make the payments.

Be it for a friend or a family member, here are the things you need to consider before signing your name at the bottom of a credit application. 

In what other ways will my signature help the borrower? 

By adding your name to the credit application, you may help the borrower access financing they would not qualify for on their own. Financing terms will depend on the lender and the borrower’s situation.

Before you agree to cosign, it is important to understand the financing terms and the responsibilities that come with it.

Before signing, here are a few tips you can give the borrower to help him improve his credit rating. If he’s recovering from bankruptcy, this article might also come in handy.

Am I willing to change my lifestyle if I have to take on the payments? 

You have to be realistic and consider the possibility that this debt might become yours alone. If you’re not willing to change your spending habits if you have to take on the entire monthly payments, you’re probably better off not signing the application. You have the means to pay, but do you want that cutting into your leisure, holiday or other expenses? 

Can my credit rating afford it?

The loan may appear on your credit report, and payment history may be reflected on the credit reports of both parties.

If you’re thinking of seeking out a loan for yourself in the near future, make sure adding extra debt to your credit history won’t affect your ability to borrow. Even if you have an agreement with the main borrower stating that they are responsible for the payments, your credit file shows you are equally responsible.

The additional debt may also be taken into account when a lender assesses your borrowing capacity for future financing.

Do I trust the borrower?

Very often, the borrower asking you to cosign is doing so in good faith. Here are a few common examples: 

  • A young person with little or no credit history
  • A self-employed person who does not qualify on their own
  • A person who is temporarily out of work
  • A person whose income, credit history or borrowing capacity does not meet the lender’s criteria

A youthful mistake or a rough patch can leave a mark on a credit report. Normally, you should have a better perspective on the borrower’s situation than a financial institution. If the person doesn’t seem to have improved their spending habits, you may want to reconsider cosigning.

If you do accept to sign, however, it is highly recommended that you keep a close watch on the borrower’s repayment.

Make sure you receive and review the account statements so you can monitor payments and address any issues quickly. For federally regulated financial institutions, co-borrowers generally have the right to receive the same statements as the other borrowers, unless they have waived that right.

In the case of a mortgage, it is extremely important to check whether the municipal and school taxes have been paid. If not, the city or the school board can claim a legal hypothec charge on the property and take legal action against the property.

The bond of trust that defines your relationship with the borrower can change over time. Family members, former friends and former partners may receive calls from collection agencies for loans they had completely forgotten about.

Keys takeaways

  • A cosigner helps an individual access funding they may not qualify for on their own.
  • The cosigner has the same responsibilities as the borrower when it comes to repaying the debt. 
  • By cosigning a loan, you must remain vigilant and keep a close eye on the payments and account statements