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What is a Co-Signer?

Finding a cosigner can be a great way to secure a loan when you’d otherwise be denied because now the bank has two parties guaranteeing the loan rather than just one. Failure to pay, however, can cause major headaches for you as well as your cosigner.

Typically, cosigners are used by teens or young adults who are taking out college loans or signing a lease on their first apartment, but cosigners are also used for small business owners who need a loan to start a business or even those who want to apply for a credit card.

A co-signer is someone who agrees to be responsible for someone else's debt if the person defaults on the loan. The co-signer signs the loan application with the borrower and effectively guarantees the loan. A small business owner looking for a start-up loan should search for possible co-signers and be prepared to present co-signers if asked by the lender.

How Does Co-Signing Work?

To become a cosigner, you must first sign loan documents that tell you the terms of the loan. The lender also must give you a document called the Notice to Cosigner. The Notice tells you what will happen if the main borrower doesn’t pay on time or defaults on the debt. Generally, lenders want to see a cosigner with a high credit score, a clean credit report, and a long history of consistent, on-time payments. Also, keep in mind that even if the main borrower pays on time and you’re not asked to repay the debt, your liability for the loan may keep you from getting other credit. Creditors will consider the loan you cosigned as one of your obligations.

If the co-signer is unable or unwilling to repay the loan and the primary borrower defaults, the co-signer's credit will suffer. It’s as though they applied for and received the loan themselves. If the loan is not paid, the lender will record the missing payments to credit bureaus, and the co-signer’s good credit. will suffer.

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