What is Cosign
To cosign is the act of signing cooperatively with a borrower for a loan. A cosigner serves as an additional repayment source for the primary borrower. A cosigner can help a borrow to obtain loan terms that they may have otherwise been unable to be approved for. They can also help the borrower to increase the amount of principal that they can receive.
BREAKING DOWN Cosign
Cosigning is often an option lenders will allow for a variety of different types of loans. It is considered a type of joint credit which is associated with either a cosigner or coborrowing agreement. A cosigner differs from a coborrower in that the cosigner does not receive the principal on the loan, nor does the cosigner have to make regular monthly payments. Many lenders offer cosigning as an option on a varietiy of credit products including personal loans, auto loans, student loans, mortgage loans and more. Some credit cards may also offer borrowers the option to include a cosigner
Cosigning can be a benefit for borrowers with low income or minimal credit history. Adding a cosigner can also improve the terms on a loan or increase the principal that a borrower is approved for. In a credit application with a cosigner a lender will require information on both the cosigner and the primary borrower. Both individuals will have to provide personal information that allows the lender to do a credit check. The underwriting decision and terms on a cosigned loan will be based on the profiles of both the cosigner and the borrower. If a loan is approved with a cosigner then standard procedures will apply. The lender will prepare a loan contract that details the terms of the loan including the interest rate and monthly payment schedule. Both the cosigner and the primary borrower must sign the loan agreement to allow for funds to be disbursed. Once the loan agreement is signed, the primary borrower receives the principal in a lump sum.
The primary borrower is responsible for making the monthly payments on the loan. If the borrower is unable to pay then the cosigner’s obligation comes into effect. The terms of the loan agreement will provide details and specific terms on when the cosigner will begin to be contacted. The cosigner may be immediately contacted if a payment is missed or they may only be responsible when a loan reaches default. Depending on the loan’s terms a lender may immediately begin to report payment delinquencies to credit bureaus for both the borrower and cosigner. (See also: What Are Co-signers Liable & Responsible For?)
For joint credit in a coborrowing agreement both borrowers receive the principal and are responsible for making the payments. Similar to cosigning a coborrowing loan agreement will consider both applicants in the credit application and underwriting process. Similar benefits are also available in a coborrowing agreement. Since the terms of the loan consider both applicants, the underwriting process is more likely to assign a lower interest rate and higher principal. Generally both parties involved in the agreement will have rights to the principal balance. As such both parties are responsible for repayment obligations. Coborrowing agreements are typically most common in a mortgage loan.
Considerations for Joint Credit
Many borrowers may consider both cosigning and coborrowing alternatives to applying for a loan individually. Coborrowing is generally more efficient when both parties will utilize proceeds from the loan such as in a mortgage. Cosigning can be a better option when the loan is sought to support a specific goal such as education or credit card consolidation. Individuals entering into any type of joint credit agreement must understand their obligations. Delinquencies and defaults from either a cosigner or a coborrower can be reported to credit bureaus at any time.