by Matt Frankel, CFP | June 24, 2019
If you need a cosigner, here’s how to go about asking someone to make the commitment.
When someone cosigns a loan for you, that person is making a major commitment. They are agreeing to accept legal responsibility for the money you’re borrowing, and that includes paying it back if you don’t.
So it makes sense that cosigners often need to be persuaded. With that in mind, here’s a quick guide to why a cosigner might be reluctant, as well as some tips to help you have the difficult “please cosign my loan” conversation and start the relationship off on a positive note.
While different lenders may have different underwriting methods, most look at the same general qualifications. Here are the most common reasons borrowers need cosigners:
Before you ask someone to cosign your loan, it’s important to know that this is a big request. There are some major implications to cosigning a loan, and these are likely to come up when talking with your potential cosigner. Here’s a quick rundown of the downsides of being someone’s cosigner:
When someone cosigns your loan, it will typically show up on their credit as if it were their own loan. This can have several potentially negative implications, such as increasing their debt-to-income ratio, which can make it more difficult to get credit in the future for their own purchases. Cosigning is often not a smart decision if that person intends to make any major purchases such as a house or a car in the near future. It also can negatively impact their credit score at first, as 10% of the FICO scoring formula comes from “new credit” information.
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Speaking of credit, a cosigner is trusting the borrower not to adversely impact their credit (beyond the small drop that generally comes with a new loan). If a cosigner has an excellent credit score, even one late payment can have a devastating effect on them.
Cosigning is also a long-term legal obligation. As we’ll discuss in a second, many lenders allow cosigners to be released from the loan after a certain number of on-time payments are made, but there’s no guarantee this will happen, and many lenders don’t offer it. As a cosigner, you’re legally responsible for making the loan payments if the borrower doesn’t.
At the end of the day, people agree to cosign loans because of personal relationships. More specifically, they do it because their feelings of personal obligation and trust outweigh the risks and downsides discussed in the previous section.
One of the best things you can do is explain to your potential cosigner why you need the loan, and how it would help you. Someone cosigning a loan can also help you build credit, which can help you achieve greater financial independence for years to come. Let them know that they’re doing you a favor in more ways than one.
I’ve said no to cosigning loans in the past because I simply didn’t trust the borrower. If someone has a history of not paying their bills over and over again, and that’s why they need me to cosign, why would their financial responsibility level be any different this time?
If there’s a valid reason you can’t obtain a loan on your own, let your potential cosigner know. Examples may include:
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In short, if you have a good reason why you need the cosigner, it can certainly help your case.
These last two steps are especially important when cosigners are friends or family members, as most are.
First off, it’s important to make it perfectly clear that cosigning a loan is a legal obligation. Your cosigner can expect the loan to show up on their credit report, and if you don’t pay, the repayment is their responsibility as well.
If your lender has a provision that allows for a cosigner to be released from the loan, discuss that in detail as well. In short, it’s important for your cosigner to know exactly what they’re agreeing to.
Finally, while in a perfect world everyone would be able to pay their financial obligations 100% of the time, the reality is that we don’t live in a perfect world. Job losses and unexpected financial burdens happen.
So it’s also a smart idea to have an honest conversation about what happens if you can’t pay the loan. For example, while it’s certainly not a pleasant situation, you may want to promise to inform your cosigner immediately if you won’t be able to make the next loan payment. Sure, your cosigner probably doesn’t want to make your car payment for you. On the other hand, if you don’t tell them, their credit gets ruined, and then they have to make your loan payments, the situation will be considerably worse.
The general theme to these four tips is to be open and honest about every part of the borrowing process, from the reasons you need the loan to what happens after you get it. While I can’t guarantee that your potential cosigner will say yes, following these four steps will help start a borrower-cosigner relationship off on the right foot.
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