When you want to borrow money, a loan agent will use your credit history to determine your risk factor as a borrower. If you don’t have a substantial enough credit history, or if you have a low credit score, a lender may request a co-signer before agreeing to lend you a personal loan. It’s an added layer of protection for lenders, because the co-signer, who generally has a strong credit score, assures that the loan will be repaid in the event that the borrower is unable to pay it.
Basically, the co-signer is vouching for you, and they believe you’re going to pay off the loan.
Anyone with a strong credit score and history can co-sign a loan, but typically, it’s someone very close to the borrower. Some experts will recommend only co-signing for a spouse or a child, but if you’re a borrower in need of a co-signer, you may ask someone you know and trust.
It’s important to know that having a co-signer for a personal loan does not affect the borrower’s credit score, but it may affect the co-signer’s credit score, if the borrower is irresponsible about their loan payments.
A co-sign loan can help a borrower access funds they otherwise might not be able to receive. This opens possibilities and creates financial flexibility. With a personal loan, you can build credit effectively, improving your credit score and creating more options for the future. If your co-signer has a strong credit score, the borrower will have access to a lower interest rate for the personal loan, making it easier to pay back over time.
While a co-sign personal loan doesn’t affect the borrower’s credit score, it can certainly affect the co-signer’s credit score and financial future. If the borrower doesn’t make payments on time—or doesn’t pay them at all—the co-signer is directly responsible for the repayment of the loan. For this reason, co-signing a loan is major responsibility for the co-signer, and it can quickly put a strain on your relationship. You should only co-sign for someone very close to you, whom you absolutely trust.
Finances are intensely personal, so you should consider carefully the advantages and disadvantages of a co-sign loan before borrowing money, asking someone to co-sign for you, or co-signing for someone else. If you borrow responsibly, and pay back on time, a personal loan can serve you well to build credit and prepare for financial freedom in the future.
Joe Schwartz | Loans Editor