The term loan cosigner denotes a person or legal entity which guarantees repayment of a personal loans, credit card balance or mortgage. A loan cosigner is legally responsible for the repayment of the loan to the same extent as the primary loan applicant.
A loan cosigner may be a co-applicant to a loan. If two applicants want to apply for a loan together, they may cosign the loan agreement and share responsibility for the amortization of the loan and the payment of interest. This is often the case with spouses who apply for mortgages or personal loans together.
A loan cosigner may also be a guarantor. In this case, the applicant is expected to meet their loan obligations, but the loan cosigner is jointly responsible to service the loan if the applicant cannot meet their obligations.
Example of a loan cosigner:
A person wants to get a personal loan to buy a holiday apartment to rent out to holidaymakers. They are confident that they can service the loan. However, because they have a large family, they are not likely to meet the creditworthiness requirements for a loan approval.
They convince a family member who does not have children to cosign the loan application. The lender then considers the combined income of both applicants, so the income-to-expenses ration is greatly reduced. Because of this, the application to meet creditworthiness requirements, and the loan is approved.
As long as the primary applicant makes their loan repayments on time, the loan cosigner is not affected. However, if for any reason the primary applicant failed to meet their loan repayments, the family member who cosigned for the loan will have to help them meet their payments. If they do not, a debt collection case may be filed against them.
For this reason, it is important for potential loan cosigners to carefully assess the applicant’s ability to service a loan before cosigning the loan agreement.
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Cosigner definition
