Credit lenders can decline loan applicants for a variety of reasons – poor credit history, applicant age, amount required, and employment, just to name a few.

It’s in these situations you may need a cosigner to push you across the line.

In this article, we’ll look at the what, the how, the who and go over a few basics.

What is a ‘cosigner’?

Let’s start with the what. A cosigner is someone who ‘promises’ to pay the debt if the applicant can’t or won’t pay.

They are very similar to a ‘guarantor’ and can be confused. Here are the differences:

Cosigner: liable for the debt without the lender needing to take any action.

Guarantor: can only be called upon to pay the debt if the lender has exhausted other options.

As you can see, pretty similar and pretty serious positions to be in.

A cosigner doesn’t have the right to drive or use your car whenever they want – they are only responsible for paying in the event you can’t. In other words, they provide a safety net for the borrower and the lender.

How can you use a cosigner on your application?

Both lenders and borrowers may request a cosigner before granting / accepting a loan contract.

It’s often the lender that will request a cosigner. To do this, there will be paperwork attached for the cosigner to fill out.

They will need the following:

• Agreement: Of course, he or she will need to agree to the requirements in the loan contract. Lenders won’t accept a verbal agreement.
• Satisfactory credit history: The cosigner needs to provide a credit score / file, to show that their previous financial responsibility meets the lender’s requirements.
• Proof of ability to pay: Income statements and proof of long term employment or funds. Lenders want to know people can and will pay them back.
• ID and residency: Various identification is needed. Lenders like stability so sometimes mortgage details or rental ledgers may be required.

Let’s take a case study:

Sam wants a loan for a new car. He has only been working casual hours for a month in a cafe after his university classes. The lender is worried that he might lose his job as he’s only new / on probation and therefore doesn’t have any legal contract guaranteeing employment.

Additionally, the casual hours might not bring in enough income to pay for bills, uni fees, living costs AND car loan repayments.

On the other hand, the lender doesn’t want to decline Sam and lose a customer. For these reasons, the lender wants to reduce the risk by having a cosigner promise to pay if Sam can’t make the repayments.

Who can be a cosigner?

Someone who meets the lender requirements listed above.

It may seem simple on paper but finding someone to agree might be more difficult in reality.

Family and friends are the usual choices – someone who trusts you and wants to help you. Parents may want to help their kids get a head start in credit history for example.

Basically, someone who has extra income and can prove it.

How can they help?

They can help by significantly increasing a borrower’s chance of getting approved.

When a potential borrower doesn’t have credit history that shows themselves to make reliable repayments, cosigners help by ‘promising’ to make those reliable repayments.

For example, a student, part time or casual worker, new driver or someone with a bad credit file might seek a cosigner. A lender will view the cosigner as ‘backup’, therefore removing the doubt of a borrower struggling with the repayments.

What are the benefits?

Other than being a safety net and actually getting the borrower across the line (mentioned above), cosigners can bring other benefits too. Here of some advantages you may not be aware of:

• Interest rates: Using a cosigner reduces the risk for the lender and in turn, the interest rate. To stay competitive, lenders need to offer attractive rates and make sure they are covered when they lend to high-risk borrowers. It’s usually these high-risk borrowers that require cosigners so it makes sense that bringing a stable income earner on board reduces rates.
• A foot in the finance door: If you successfully find a cosigner and make the loan repayments yourself, your credit score can rise significantly. This will help for future credit requirements, for example, a home loan. You may have heard of ‘building a good credit file’. This can work in the cosigner’s favour too as their already-high credit file can rise further.
• Trust building: This one may seem unrelated but the relationship between a cosigner and borrower (if successful), can really help in building trust. Knowing someone trusts you enough by cosigning a loan for you and vice versa – helping someone get over the line with their loan can be worthwhile in itself.

What are the disadvantages?

Of course, it’s not all good. Other being legally responsible for a loan, there are a few other things to think about:

• Risk to credit score: If a loan is not serviced by the borrower OR cosigner, both can expect negative marks on their credit files. This is often avoided as cosigners are people with high capacity to make repayments.
• Other attachments: In the event of a car crash or the car is written off or stolen, insurance companies often hold cosigners accountable for claims too. This may result in the cosigner paying unexpected bills other than simply the loan repayments.

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Cosigners overall

As we’ve discovered, cosigners sign on some pretty serious dotted lines.

They can make or break someone’s car dreams and can really help them get into the credit world. Just make sure all parties fully understand the loan contract – there’s no harm in asking.

Do you need a cosigner for your car loan? See what the rates and repayments will look like for your next car by contacting the Home Loan Experts team.