A personal loan cosigner is an individual who agrees to become legally responsible for another person's debt. The borrower may choose to apply for a personal loan at a common lending agency, such as a bank, or may instead apply to an outside financing company. Should the borrower default on the debt, the cosigner is required by law to pay the remaining balance of the loan and any penalty fees that have accrued.
An individual may take out a personal loan to cover a wide variety of purchases. The money may be borrowed from a bank, a credit company, or other traditional lending vehicle. This type of loan is different from a car loan or home equity loan in that the items for which the money is being used are often not disclosed to the lender. Other agencies, such as financing companies, may also choose to make personal loans, but generally charge a higher interest rate during repayment.
A person may need a personal loan cosigner if he has little or no credit history. Credit history is a numerical rating by several outside credit rating agencies that evaluates an individual's ability and willingness to repay debt. This number can be affected by making monthly bill payments on time and in full, successfully paying off previous debt, and having a higher monthly income than monthly debt ratio.
Young people who have never been required to make monthly bill payments or pay down debt tend to have no credit history, and need a personal loan cosigner when borrowing money for the first time. The lending agencies in such situations do not have enough information about the borrower's ability to repay debt, and ask for a cosigner to guarantee that their money will be repaid by one party or the other. Those who have defaulted on previous debt will have a low credit score, and may need a cosigner who can financially vouch for their new willingness to be responsible towards any future debt.
The personal loan cosigner becomes legally responsible for the borrower's debt. If the borrower fails to make his monthly payments, the lending agency will require the cosigner to begin repayment immediately. In extreme measures, if the cosigner is unable to repay the borrower's debt, the lending agency may choose to sue. The wages of the cosigner may be withheld until the debt has been repaid, in addition to any late fees and penalties that have accrued during the proceedings. If the cosigner chose to list a home, car, or other property as collateral against the debt of the borrower, than those items may be repossessed by the lending agency in an effort to cover the cost of the loan.
A personal loan cosigner should first consider whether he is capable of repaying the full amount of the loan prior to signing with the borrower. If the amount taken out is higher than the cosigner feels comfortable agreeing to, he should not cosign the loan. He can also ask the lending agency to add to his portion of the agreement that, should the borrower default on the loan, the lending agency will only request the amount of the loan from the cosigner, and will not hold him responsible for late and penalty fees as well. Some parties may feel more comfortable drafting an agreement between the borrower and the cosigner in the presence of a lawyer, prior to filling out the necessary paperwork for the lending agency, in which a reasonable repayment plan is discussed and agreed to.