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 Process

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?)

Coborrowing

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.

RELATED TERMS
  1. Joint Credit

    Joint credit is credit issued to two or more people based on ...
  2. Accommodation Paper

    An accommodation paper is a third-party pledge to assist in the ...
  3. Unsecured Loan

    An unsecured loan is a loan that is issued and supported only ...
  4. Signature Loan

    A signature loan is a personal loan offered by banks and other ...
  5. Loan

    A loan is money, property or other material goods that is given ...
  6. Direct Consolidation Loan

    A direct consolidation loan is a type of direct loan that combines ...
Related Articles
  1. Personal Finance

    Co-signing a Loan? Make Sure You Know The Risks

    Contractually, co-signers are just as responsible as the person actually borrowing the money.
  2. Retirement

    Seniors: Before You Co-sign That Student Loan

    If that loan isn't paid back, you could be on the line for the whole amount, plus penalties.
  3. Managing Wealth

    The Best Way to Help Your Parents Buy a Home

    If your are thinking of assisting your folks with a home purchase, be sure you understand the financial consequences.
  4. Personal Finance

    6 tips for getting approved for a mortgage

    Are you consider to get a mortgage? Check out this step-by-step guidance on how to get pre-approval for your home mortgage.
  5. Personal Finance

    Here's How to Get a Car With No Down Payment

    Here are some ways that you can buy a car with no down payment while also avoiding higher interest rates.
  6. Personal Finance

    Things You Shouldn't Do During A Recession

    These tips can help you avoid financial risk at any time, but they're especially important during an economic slowdown.
  7. Personal Finance

    Have Bad Credit? 6 Ways to a Personal Loan Anyway

    It'll cost you more, but borrowing is definitely doable. Here's how to proceed.
  8. Trading

    8 ways to help family members in financial trouble

    Find out how to help the ones you love financially — without hurting yourself.
  9. Managing Wealth

    How To Get A Business Loan If You Have Bad Credit

    Your business' credit standing may be less than stellar, but you can still get financing. We show you how.
Trading Center