Do you need a loan, but your credit issues are making it difficult to get approved?
Many Canadian borrowers find themselves unable to get approved for loans for a variety of reasons, including poor credit, too much debt, and difficult financial histories.
This is where a cosigner can help. A cosigner is someone who agrees to step in and make your payments in the event that you cannot.
In this guide, we’ll tell you everything you need to know about using a cosigner for a loan, including how a cosigned loan works, when you should consider a cosigner, and how to apply.
Key Points
- A cosigner is someone who takes responsibility for loan payments in the event the primary borrower defaults on the loan.
- A cosigner may be needed if you can’t qualify for a loan on your own, are looking to reduce your interest rate, or secure more favourable loan terms.
- Cosigners must have good credit and a strong income to qualify, and preferably a close relationship with you.
- You can use a cosigner for several loan types, including car loans, mortgages, personal loans, and student loans.
What Is A Cosigner?
A cosigner is a person with strong credit and finances who agrees to repay the debt if you don’t follow through with your promises to make payments. A cosigner basically allows you to “borrow” their credit and financial profile if yours are weak. This can help make a lender feel more secure about extending funds to you, which can increase your chances of loan approval with a better rate.
Who Can Be A Cosigner?
Cosigners can be anyone – including friends or other family members – who have a good credit history and have proven to be responsible with their finances in the past. The most common scenarios involving cosigners include parents cosigning on a loan on behalf of their children.
Regardless, the cosigner must have good credit and strong finances to qualify. They must also understand that becoming a cosigner is a major financial commitment. It requires them to put their credit history and finances at risk if the primary borrower fails to continue making loan payments.
Do All Lenders Allow Cosigners On All Loan Types?
No, not all lenders allow cosigners on loans. It all depends on the individual lender and the loan type. While many lenders accept cosigners to help borrowers qualify for loans, some don’t.
Further, some lenders that do allow cosigners may only do so if the loan is secured, such as car loans and mortgages. With an asset of value involved, the lender’s risk may be further reduced. In other cases, some lenders may allow guarantor loans instead of cosigners.
If you’re looking to take out a cosigner loan, make sure you check with the specific lender to see if they permit it.
Loans You Can Get With A Cosigner In Canada
With the large variety of loans available to Canadian consumers, you might be wondering, which loan options allow cosigners?
Can I Get A Cosigner For An Auto Loan?
If you’re buying a car and your financial and credit profiles are not strong enough to qualify, adding a cosigner can improve your chances of getting a car loan. It can also help you secure a better rate and more favourable terms.
Can I Get A Cosigner For A Personal Loan?
Yes, you can get a cosigner to help you secure a personal loan if you’re struggling to get approved due to a poor credit score, high debt levels, or low income. A cosigner will also help you receive a lower interest rate, saving you money over the long run.
Your lender will be more willing to allow a cosigner to be added to your personal loan if you’ve been a client with them for a while. If you can’t keep up with your loan payments, your cosigner will be required to take over.
| Check your credit score before applying. Before applying for a personal loan, it’s always a good idea to check your credit with a free service like CompareHub. |
Can I Get A Cosigner For A Mortgage?
Yes, you can. When a person cosigns your mortgage, that individual promises to pay the mortgage payments if you can no longer keep up with your payments.
The lender will want to vet the cosigner. For instance, the cosigner’s credit history, income, and debt are all taken into consideration.
Cosigning a mortgage is a significant risk for the cosigner. This is why it’s more common for immediate family members to assume this role, rather than friends or acquaintances. For example, some parents may cosign a mortgage for their adult children or vice versa.
Can I Get A Cosigner For A Debt Consolidation Loan?
If you have trouble getting approved for a debt consolidation loan, you may be able to have a cosigner added to the loan contract. With a debt consolidation loan, you can use one loan to pay off multiple debts. Rather than several payments to worry about, you’ll be left with one easy-to-manage bill, often at a lower interest rate.
A cosigner will help strengthen your loan application by making up for a weak credit profile and income. If you fail to make payments at some point throughout the loan term, the cosigner will be responsible for repaying the debt.
Can I Get A Cosigner For A Student Loan?
Yes, you can get a cosigner for your student loan, as long as the person has a qualifying credit history, a steady income, and a relatively low debt load. Again, the cosigner will need to agree to assume the responsibility of making payments in case you fail to keep up with your loan obligations.
Can I Get A Cosigner For A Business Loan?
Yes, lenders allow entrepreneurs looking to take out a business loan to have another person sign on as a cosigner. If your credit score is a little on the low end and you don’t have any assets that are valuable enough to back the loan, a cosigner can help you secure a business loan.
As is the case with other loan types, a cosigner of a business loan must repay the loan balance in the event that you are not able to.
What Are The Eligibility Requirements For A Cosigner?
To be considered a cosigner on a loan, the person should meet the following criteria:
- Be a Canadian citizen or a permanent resident
- Be the age of majority in their province/territory
- Have a good credit score of at least 660
- Have a stable and sufficient income
- Have a low debt-to-income ratio
- Have an active bank account
Learn more: Should You Cosign A Loan? The Good And The Bad
How To Apply For Loans With A Cosigner In Canada
If you’re unable to qualify for a loan on your own merit, you may want to include a cosigner on your loan. To apply for a loan with a cosigner, follow these steps:
Step 1: Compare Lenders
Before applying with a lender, be sure to inquire whether they offer loans with a cosigner. You can use a loan comparison platform like Loans Canada to find lenders and compare their offers to find the best deal. In one online search, you can get multiple offers with a single application.
Step 2: Apply
Once you know which lender you’d like to apply with, fill out the application form, including all relevant information about yourself, your finances, and your credit health. You’ll also be asked to submit certain documents to support your application.
Keep in mind that the same will be asked about the cosigner. So, whatever information and documents that are required from you will also be required from the cosigner.
Documents Needed To Apply For A Cosigned Loan
Documents required may include the following:
- Photo ID: A government-issued photo ID, like a passport or driver’s license, can help lenders verify your identity and that of the cosigner.
- Proof Of Residency: To show that you and the cosigner live in Canada, you may be asked to supply a document with your name and address, such as a utility bill or lease agreement.
- Proof Of Income: You and the cosigner may be asked for pay stubs, bank statements, a CRA notice of assessment, and/or a letter of employment to demonstrate that you’re steadily employed and earn a sufficient income.
Step 3: Wait For Application Review
The lender will review your application and documents, then let you know soon after whether you’ve been approved for a loan. Depending on the lender, this can take anywhere from a few hours to a few days. Generally speaking, you’ll likely get a much faster response from an online or alternative lender, often the same day of application.
Step 4: Get Funded
Once approved, you’ll receive your funds shortly after. Again, the type of lender you apply with will determine how quickly you can access your borrowed funds. Online lenders typically provide funding in as little as 24 hours via direct deposit or e-transfer.
How Do Loans With A Cosigner Differ From Loans Without A Cosigner?
In the case of a traditional loan, no cosigner is available to guarantee the loan. If you default, there is no one there to take over your payments.
Loans with a cosigner, on the other hand, offer some assurance to the lender that the loan payments will be made even if the borrower is unable to make payments on their own. As such, the chances of getting approved for a loan without established or good credit are much higher with the inclusion of a cosigner.
Cosigner Loans Vs Guarantor Loans: What’s The Difference?
Cosigners and guarantors on loans are very similar, but they’re not exactly the same.
- Cosigner Loans: A cosigner is someone with good credit who signs a loan contract and is immediately responsible for loan repayments if the primary borrower misses them. Their credit is directly impacted by the loan. If the loan is collateralized, the cosigner’s name will appear on the title.
- Guarantor Loans: A guarantor is someone who steps in to make loan repayments only after the primary borrower defaults on the loan. Guarantors don’t make regular loan payments, but rather provide financial backup. Unlike a cosigner, a guarantor’s name will not appear on the title.
When Should You Add A Cosigner To A Loan?
You might want to consider including a cosigner in your loan contract under the following circumstances:
| You Have Bad Credit (Or No Credit) | If your credit score is too low to secure a loan on your own merit, or you’re new to credit and are starting from scratch, a cosigner with strong credit can improve your chances of loan approval by reducing the lender’s risk. |
| You Lack Sufficient Income | If your income isn’t high enough for the lender, a cosigner with strong financials can help. |
| You Have A High Debt-To-Income (DTI) Ratio | If you’re already dealing with a lot of debt, your DTI ratio may be too high for your lender’s comfort level. In this case, adding a cosigner can reduce the lender’s risk. |
| You Want A Lower Rate | Even if you can get a loan on your own, you may not be able to secure a low rate. If so, adding a cosigner can help reduce your rate and make your loan more affordable. |
| You’re Self-Employed | If you earn an irregular or fluctuating income, a cosigner can provide the lender with additional financial security. |
Learn more: Personal Loan Requirements: How To Qualify For A Personal Loan
Pros And Cons Of Getting A Cosigner
Before getting a cosigner for your loan, you should understand the perks and drawbacks that come with this type of arrangement.
Pros Of Getting A Cosigner
Benefits of having a cosigner added to your loan contract are as follows:
- Helps you qualify for a loan. If your credit score and income are low and your debt load is too high, you might have a tough time qualifying for a loan. Adding a cosigner with a favourable credit history and financial profile will increase your odds of loan approval.
- Helps you rebuild your credit. Having a loan and making timely payments on it can help you establish your credit profile over time. If you can’t get approved for a loan, you won’t have this opportunity. But a cosigner can help you access a loan to help you build your credit score.
- Helps you secure better terms and lower interest. Even if you could get approved for a loan without the help of a cosigner, you might not be able to get the best terms or lowest rates. With a cosigner, however, you may qualify for a lower rate to help you save money and may even get approved for a higher loan amount if needed.
Cons Of Getting A Cosigner
Consider the following potential drawbacks of having a cosigner before adding one to your loan agreement:
- May affect your relationship with the cosigner. The cosigner is assuming a huge risk if you fail to make payments in the future. If that happens, your relationship with the cosigner can be negatively affected.
- Cosigners are at risk. If you default on the loan, the cosigner may be stuck paying late fees and collection costs. Even worse, they may face litigation if the loan is not paid.
- Missed payments affect both your credit scores. Missing loan payments will not only have an effect on your credit profile, but could also affect your cosigner’s.
What Can You Do If You Can’t Get A Cosigner?
If you’re unable to find a suitable cosigner, your best bet may be to take steps to establish or improve your own credit and wait until your credit history is strong enough to support loan approval. There are several things you can do right now to help you give your credit rating a boost:
- Take out a secured credit card. Secured credit cards are easier to get approved for and require security in the form of a deposit, which becomes your credit limit. This is a great way to build credit from the ground up if you’re unable to get approved for a traditional unsecured credit card.
- Make payments. Once you’ve got your hands on a credit product, be sure to make all payments on time and in full every month, not just the minimum amount.
- Keep your credit card expenditures low. It’s never a good idea to spend up to the limit on your credit card. Whatever your credit limit may be, try to spend no more than 30% of it every month. Credit utilization plays a big role in credit score calculation.
- Don’t apply for too many loans. Putting out too many loan applications within a short amount of time can harm your credit score. Instead, resist the urge to apply for too many loans, which will leave a “hard inquiry” on your credit report and pull your score down.
- Apply with an alternative lender. Traditional lenders may frown upon loan applicants with bad credit. If you can’t meet their strict loan requirements, you may have better luck with an alternative lender, as their loan criteria tend to be more flexible.
Final Thoughts
If you’re in need of extra money but can’t qualify for a loan on your own, a cosigner can help. Just make sure that both you and the cosigner understand the responsibilities and implications of having a cosigner on the loan contract. Ideally, the cosigner will never have to step in if you keep up with your loan payments. The goal is to use your cosigner as a stepping stool to help you get the financing you need while still practicing sound financial habits.
