Co-Sign: What It Means in Lending, Types and Examples

What Is Co-Sign?

To co-sign is to sign jointly with a borrower for a loan. A co-signer takes on the legal obligation to be a backup repayment source for the loan and, as such, reduces the risk for the lender and helps the borrower obtain a loan.

A co-signer can also help a borrower obtain more favorable loan terms than they might otherwise have been approved for. Having a co-signer can also help the borrower qualify for a higher amount of principal.

Understanding Co-Sign

Co-signing is an option that lenders will often allow for a variety of loans. It is considered a type of joint credit that is associated with either a co-signer or co-borrowing agreement. Co-signing can be a benefit for borrowers with low income or minimal credit history. Adding a co-signer can also improve the terms on a loan or increase the principal that a borrower is approved for.

Co-Signer vs. Co-Borrower

A co-signer differs from a co-borrower in that the co-signer does not receive the principal on the loan, nor does the co-signer initially have to make regular monthly payments. Many lenders offer co-signing as an option on a variety of credit products, including personal loans, auto loans, student loans, mortgage loans, and more. Not all lenders allow for co-signers, so if you know you'll need a co-signer, it's important to do your research before you pick out a personal loan. Some credit cards may also offer borrowers the option to include a co-signer.

How Co-Signing Works

One of the most common examples of co-signing is a parent signing an apartment lease for their child. Though this does not involve any lending, many first-time renters have difficulty obtaining an apartment, as they don't have a sufficient credit history or they don't make enough income to provide the landlord with some added comfort.

In these situations, a parent will co-sign the lease, providing added comfort to the landlord, thereby allowing the child to rent the apartment. The parent will not be paying monthly rental payments but if the child is not able to make payments, the parent will be on the hook to do so, and if they do not, their credit history can be negatively impacted.

In a credit application with a co-signer, a lender will require information on both the co-signer and the primary borrower. Both individuals will have to provide personal information that allows the lender to do a credit check. The underwriting decision and terms on a co-signed loan will be based on the profiles of both the co-signer and the borrower.

If a loan is approved with a co-signer then standard procedures will apply. The lender will prepare a loan contract that details the terms of the loan, including the interest rate and monthly payment schedule. Both the co-signer and the primary borrower must sign the loan agreement to allow for funds to be disbursed. Once the loan agreement is signed, the primary borrower receives the principal in a lump sum.

The primary borrower is responsible for making the monthly payments on the loan. If the borrower is unable to pay then the co-signer’s obligation comes into effect. The terms of the loan agreement will provide details and specific terms on when the co-signer will be contacted. The co-signer may be immediately contacted if a payment is missed or they may only be responsible when a loan reaches default. Depending on the loan’s terms a lender may immediately begin to report payment delinquencies to credit bureaus for both the borrower and co-signer.

How Co-Borrowing Works

For joint credit in a co-borrowing agreement, both borrowers receive the principal and are responsible for making the payments. Similar to co-signing, a co-borrowing loan agreement will consider both applicants in the credit application and underwriting process. Similar benefits are also available in a co-borrowing agreement.

Since the terms of the loan consider both applicants, the underwriting process is more likely to assign a lower interest rate and higher principal. Generally, both parties involved in the agreement will have rights to the principal balance. As such, both parties are responsible for repayment obligations. Co-borrowing agreements are typically most common in a mortgage loan.

The Bottom Line

Many borrowers may consider both co-signing and co-borrowing as alternatives to applying for a loan individually. Co-borrowing is generally more efficient when both parties will use proceeds from the loan, such as in a mortgage.

Co-signing can be a better option than obtaining a loan individually when the loan is sought to support a specific goal such as education or credit card consolidation. Individuals entering into any type of joint credit agreement must understand their obligations, particularly as delinquencies and defaults from either a co-signer or a co-borrower can be reported to credit bureaus at any time.