What does it mean to co-sign a personal loan?
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UPDATED: Sep 21, 2011
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When a borrower has poor credit, a co-signer can often be a good solution for getting approved for a larger loan amount with a better rate. The co-signer essentially backs the loan with his or her own personal finances.
An individual who might not be approved for a loan based on his or her own credit score can be qualified for the loan they need if the co-signer has a high credit rating. The co-signer’s involvement in the loan can expedite the approval process, and especially helps if the borrower is applying for an unsecured loan that is not backed by collateral.
It is common for family members or close friends to co-sign on an individual’s personal loan. This can also be an option for borrowers with no credit, like students getting a loan for the first time who need their parents to co-sign.
However, this means a serious involvement in the loan, not merely a signature on a piece of paper. The debt of the other person’s loan will often show up on the co-signer’s credit report and may also affect his or her own ability to get a loan.
In a pamphlet on co-signing a loan, the Federal Trade Commission says, “When you’re asked to cosign, you’re being asked to take a risk that a professional lender won’t take. If the borrower met the criteria, the lender wouldn’t require a cosigner.”
Co-signing on another person’s loan can be a good deed to help a friend or family member, but it also means significant financial responsibility and a lasting mark on the co-signer’s credit.