What Does it Mean to Co-Sign a Loan?

When you co-sign a loan, you promise to pay off the loan in the event the primary borrower is unable to pay off the loan. A co-signer becomes necessary when the person applying for the loan doesn't have sufficient credit history, reliability or income to get the loan on his own. For example, people who have a history of defaulting on loan payments likely wouldn't be approved, neither would a recent graduate who hasn't had time to build credit. If you've been asked to co-sign a loan or find yourself in need of a co-signer, here's how it works.
 

Should I co-sign a loan?

It's probably most common for parents to co-sign loans for their children who have yet to build a credit history, but other relatives and friends may also come to you. No matter who asks you to act as a co-signer, it's a decision you should weigh carefully. After all, you're being asked because the borrower was turned down. If you trust the borrower and have confidence in his or her ability to repay the loan, co-signing can be a generous way to help a friend or family member in need.

First of all, to be eligible to co-sign, you have to have a strong credit score. If you're able to co-sign, make sure you have an accurate picture of what it will mean to you and your financial situation:

  • Be sure you can afford to pay off the debt if the borrower defaults. If you had to assume the payments for this loan and it would hurt you financially, you probably should not co-sign the loan.
  • Get copies of all the loan paperwork, and be sure you understand the terms fully before agreeing. Sometimes the responsibility of the co-signer varies, and you'll want to take note of when you'll be contacted or what you'll be responsible for paying.
  • Consider what co-signing a loan will do to your credit score; this loan will appear on your credit report. If you plan to take out a loan yourself in the near future, you may not want to co-sign now as it will increase your apparent debt load and could potentially hurt your ability to be approved.
     

Should I ask someone to co-sign my loan?

If you find yourself on the other side of this equation and in need of a co-signer, you should carefully consider your options. This may be a signal that you should reconsider the loan. It may be a better financial decision to save enough money to make the purchase without a loan. You should also take steps to fix any problems on your credit report that prevented your approval.

However, if you absolutely need the loan or were denied because you're young and have yet to establish a credit history, a co-signer might be a good option. In this case, look for a co-signer who is financially responsible. If you do run into trouble on your payments, that person will have to pay on your behalf. If they don't, you'll be responsible for the loan.

When you use a co-signer, make sure you understand the terms and conditions of the loan, such as when your co-signer would be notified of your inability to pay, and which of you would be responsible for missed payments.
 

Explore loan options with CIBC

Whether or not you'll need a co-signer, you can explore a variety of loan and line of credit options from CIBC. You can apply for personal loans, car loans and more online, or you can talk to a CIBC advisor at 1-866-525-8622 if you have questions.