If you are having difficulty securing a personal loan, or are struggling to secure a competitive interest rate alone, cosigning a loan could be a good option for you. Cosigning a loan is when an individual agrees to repay your loan for you if you become unable to repay your loan for any reason. Cosigning often comes about when it is difficult for an individual to secure a loan alone due to a poor credit score, an incomplete credit history, or insufficient income. If, for example, you have a history of defaulting on loan repayments, or have not yet built up a credit history, it could be challenging for you to secure a loan when you need one. In this article, we explain all you need to know about cosigning a loan, including the risks and advantages of doing so.
How does cosigning a loan work in Canada?
A cosigner is somebody that agrees to pay your debt if you default on your loan, or are unable to make a payment. To lenders and financial institutions, a cosigned loan is a safer bet because there is double the reassurance that they will receive their repayments. There is less risk involved for the lender. For this reason, many lenders are likely to accept and in return the borrower can benefit from more favourable interest rates and better terms. This can make cosigning a loan an attractive option, but there are some things to consider before you push ahead. For instance, the cosigner will need to have a good credit score, and one that is much stronger than the original borrower. The secondary borrower will also need to go through a thorough application process. Popular examples of cosigning a loan include having your parents cosign your student loan, or an individual who has previously gone bankrupt may ask a partner to cosign a personal loan for them. While you may think cosigning a loan is the same as having a guarantor, it is slightly different. As the name suggests, a guarantor provides a guarantee on someone else’s debt if the original borrower fails to repay. Comparatively, when cosigning a loan if the primary borrower defaults, the lender does not need to act to reclaim payment – the cosigner is automatically responsible without a request. As for joint applicants on a loan, the responsibility is shared equally including the benefit of the loan, whereas a cosigner purely shares the potential risk by helping the borrower with financing the loan.
How does cosigning a loan work for different types of loan?
As cosigning a loan means that you take on all of the risk and responsibility of a loan, without benefitting from the loan itself, it can affect the cosigner differently depending on the loan being taken out. If, comparatively, you want to benefit from the loan, you should take on the loan as a joint applicant instead. There are two primary forms of loan you can take out: unsecured and secured.
Cosigning a secured loan
A secured loan is any kind of loan that is associated with an asset. Most commonly, they are car loans or mortgages. If the borrower defaults on a secured loan, there is simply an asset for the lender to repossess, be it a car or a house. Of course, the cosigner will not benefit from either the car or the property, but will be responsible for the debt should the primary borrower fail to make their payments. Secured loans can be considered less risky because should the lender not receive their payments, instead of chasing the cosigner for repayments they can instead seize the asset.
Cosigning an unsecured loan
An unsecured loan is a loan that is taken out but not associated with an asset. Much like secured loans, the cosigner will not benefit from the loan but they will need to be responsible for the debt if needed. Unsecured loans can be riskier to cosign because there is no associated asset to seize if the primary borrower cannot make their payments. This ultimately means there is a greater likelihood that the cosigner will need to produce the payments instead.
Is cosigning a loan a good idea?
Cosigning a loan is not a decision that should be taken lightly. It is a huge responsibility after all – you are essentially agreeing to take on the borrower’s debt if they cannot make their repayments for any reason. Remember the reason for potentially cosigning, which is because the borrower is unable to guarantee they will repay the loan on their own. You need to carefully consider your trust in the borrower, and be confident in their ability to repay the loan. Of course, it is a kind way to help and support a loved one who needs it. Most often cosigners are parents supporting their children when they lack credit history, for instance, to secure a student loan. It is not uncommon to help other family members or friends in need too. Not just anyone can cosign a loan, either – you need to have a good credit score. You also need to be confident in your ability to repay the debt if needed. If it could be damaging for your financial situation, it is not a sensible move for you. You should also make sure you understand all of the terms of the loan before you agree to cosigning – sometimes the conditions can vary. Consider also the impact of cosigning a loan on your credit score, as it will be recorded on your credit report. This could also impact your own ability to borrow credit or to take out a loan for yourself.
Advantages and disadvantages of cosigning a loan in Canada
Before cosigning a loan, you should take the time to understand the advantages and disadvantages of cosigning a loan in Canada. Here are the key advantages:
Advantages of cosigning a loan
- It can substantially increase the likelihood of the primary borrower securing a personal loan
- A cosigner with a good financial history can mean you have a lower interest rate thanks to the reduced risk
- It can help with gaining better repayment terms, like lower payments or payments spread across a longer period of time
Disadvantages of cosigning a loan
- It could have a negative impact on a co signer’s credit
- It can be difficult to find a cosigner that will be able to or willing to commit financially
- It could have a very negative impact on your relationship with a friend or family if you are unable to make the repayments
What do you need to be able to cosign a loan?
There are some eligibility criteria a borrower will need to hit in order to be able to cosign a loan. These include:
- Meeting the age requirements set by your province
- Being a Canadian citizen or a permanent resident
- Having an established credit report
- Proof of a steady income
- Having an active bank account in your name
Should I ask someone to cosign my loan?
If you are in need of a cosigner, it is a good idea to consider some questions before you ask somebody to do so. For instance, why do you need the loan in the first place? Is it because you are struggling financially and want to secure additional credit, or because the loan is essential for your education or career? In some instances, you may well be better off to not borrow additional funds, and instead to seek out a form of debt relief. If unsure, it is a good idea to speak to a Licensed Insolvency Trustee – they are the only professionals in Canada legally able to file all forms of debt relief. You can book a free consultation with an experienced trustee at Spergel, as we have been helping Canadians gain debt relief for over thirty years. It could also be possible to rebuild your credit score to enable you to take out a loan without the need for a cosigner. If, however, you need the loan and no alternative option will do – perhaps because you are too young to have built up a credit score – a cosigner could be a good option for you. In this instance, make sure your cosigner is responsible financially as they will need to cover your payments on your behalf should the worst case scenario come about. A parent or a close family member that you trust is usually the best option for a cosigner. Ensure that you both understand all of the conditions of cosigning a loan and the consequences of defaulting on payments, as well as the payment terms and frequency. The larger the amount being borrowed, the more difficult it is to repay.
How to apply for a loan with a cosigner
First of all, you should compare your options. You should look at different financial institutions, lenders, and products. Make sure that for any loan you find, cosigners are permitted. You should also begin to pull together your documentation. You will need to prepare for any information the lender may need from you, including ID, evidence of income, and employer information. Your cosigner will need to prepare this information too. If you can have it ready ahead of any appointments with your financial institution, the quicker and simpler this process will be. Once you are ready, you can apply for the loan. It is probably worthwhile having your cosigner with you should there be any additional questions or information you need to provide.
While cosigning a loan can be a great option for securing a loan when needed, it does come with risks. If you have any questions around cosigning a loan or if you need support with gaining debt relief, book a free consultation with Spergel. Our Licensed Insolvency Trustees have been helping Canadians gain debt relief for over thirty years, and can help you to secure the finance you need too. You owe it to yourself.