Have you struggled to get a loan in the past? Despite having a good credit rating and reasonable income you weren’t ticking some of the boxes that the banks required. Or maybe you have a great credit rating and poor income, or vice versa. A cosigner can help you get over this hurdle and back on your feet.
Mortgages are the most likely place you’ll go searching for a cosigner. A mortgage is one of the biggest loans you’ll ever take out, and banks like to make sure that you have the ability to pay them back before the lend you hundreds of thousands of dollars. If you fail to tick even one of the boxes for a mortgage, a cosigner may be the only way you can go to get the paperwork over the line.
A cosigner is equally responsible for the loan. While you might agree with one another that you will be fully responsible for the payments, the banks can knock of the cosigners door if payments start to fall through. However responsibility goes both ways, the cosigner may come along many years later and demand their rights to the property, either to live in or perhaps a portion of the value.
Cosigners may be used for other loan types as well. If you want to take out a car loan, personal loan, student loan or even a business loan –you can have a cosigner in any case.
Risks for the Cosigner
Cosigners are at a large risk with loans. While they have rights to any assets purchased through the loan (such as a home, or a car) the risks to the cosigner are likely to outweigh the benefits.
While the primary signer of the loan has primary responsibility, the cosigner agrees to take on all those debts if the primary signer of the loan defaults. Not only will the cosigner need to cover repayments, they can also be slugged with late fees and collection fees. In this case their credit score will suffer as well.
Even if you make all the payments, the cosigner will still have their finances affected. If the cosigner wants to take out a loan of their own, then this loan will be taken into account when calculating their liabilities.
Releasing a Cosigner
A cosigner for your loan shouldn’t be there for the life of the loan. A cosigner is needed to get you past the first hurdles of taking out that loan. Once you have been repaying it for a few years, you should have built up a better work history, better income, or a more stable job history. Even if you haven’t improved your situation dramatically, the loan balance should be reduced after a few years.
Once you have cleared these hurdles you can and should release the cosigner. In most cases this can be done directly with your creditors, sometimes you will need to finance, but other times the cosigner can simply be removed from the loan.
At this stage the cosigner will no longer be on the hook if you default from the loan, but they will also forfeit any claims to your assets. It’s a win win, and a good way to thank them for their support in the early days.