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What is a Co-Signer on a Loan?

If you have prime credit, then you have a winning ticket toward securing the investments that you need toward a bright future. From auto loans to mortgages, those with prime credit are often rewarded for their smart spending.

Man in a Suit Offers to Sign a Contract

But if friends and family have less than perfect credit, you might soon find yourself wondering "What is a co-signer on a loan?" Co-signing a loan allows someone with good credit to help out someone who isn't as financially secure. While this can be a lifesaving gesture to those who are building a new life, co-signing a loan is not without risk. Find out whether or not you should co-sign in our guide to personal finance. Does co-signing a loan affect credit?

What are the Perks of Co-Signing a Loan?

Sometimes good people end up with bad credit. Maybe your spouse is working off college credit card debt, or your son or daughter has no credit history at all. In these cases, you can become a co-signer to a loan in order to look more appealing to lenders. This can help pave the way for your friend or family member to become more independent by securing that car, home, or other investment that they need for a better tomorrow.

What are the Drawbacks of Co-Signing a Loan?

When you co-sign a loan, you become responsible for the investment. Even if your borrower vows to pay every bill promptly by themselves, if they fail to make payments, you are held liable for their inaction. Their poor financial decision can leave a stain on your credit report, so think long and hard before you agree to co-sign for anyone.

How Do I Get Out of a Co-Signed Loan?

This is where things get even trickier. Let's say your co-signer left you in the cold, and you learned a little too late that they were unreliable. Here are a few things to keep in mind:

  • You and your borrower are both responsible for the missing payments. If your borrower will not make the payment, it's better for you to catch up to the payments to avoid a negative impact on your credit score.
  • Push to refinance the loan in the borrower's name only. This is the ideal solution, but if your borrower has proven to be irresponsible, the lender may not let you off the hook.
  • Speak honestly with the borrower to come up with a repayment plan if they can no longer afford the investment. Come up with a plan for the future that is fair to both of you.
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