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Cosigning a Loan: Definition, Responsibilities & Risks

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, we talk about what it means to be a cosigner on a loan. We also learn what goes along with being a cosigner, such as the responsibilities and risks.

Definition

Just what is a cosigner? A cosigner is someone with a good or excellent credit score who agrees to guarantee the payment of a loan or some other contract for someone else.

For example, say James is looking to buy a car, but the car company tells him that he needs a cosigner in order to get the loan because they don't believe he is capable of paying off the loan. So James calls his good friend Emmanuel who has an excellent credit score and asks him to be his cosigner. Emmanuel asks James some questions, and he agrees to be James' cosigner for the car loan. The car company runs Emmanuel's credit and determines that he is creditworthy. The keys are then handed to James, and he drives off in his new car.

Who Needs a Cosigner?

Why exactly did James need a cosigner to purchase his car? Well, he needed a cosigner because his credit score wasn't high enough. It could be that James was late in paying his credit cards several times, or it could be because James doesn't have any credit history. Whatever the case, in the eyes of the car company or any other company that is giving you a loan, when you have a low credit score, you are not reliable in paying back your loan. So, in order to get a loan from said company, a cosigner with a good enough credit score (who is willing to help you out and guarantee your loan) is needed.

Responsibilities

The biggest responsibility that the cosigner has is that of guaranteeing the payment of the loan. The cosigner needs to make sure that he or she is in a position to pay back the loan in case the original person can't. Some companies will work with cosigners and notify them when a payment is missed so the cosigner has time to work with the original person or make arrangements to pay the missed payment.

Emmanuel knows this big responsibility. This is why he asked James several questions before agreeing to be his cosigner. Emmanuel made sure James will be willing to work with him if he is unable to pay the loan for his new car.

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