The benefits of having a cosigner on a loan include actually securing loan approval, getting favorable terms on the loan, and developing a credit rating. A cosigner can also provide accountability to borrowers, who will understandably want to make sure that they meet their loan obligations in order to avoid embarrassment and causing financial hardship for the cosigner. By having a loan cosigned by someone with a better credit rating than that of the borrower, a borrower can save a lot of money over time, which aids in improving her credit score and overall financial health.
Many lenders, including banks, mortgage lenders, and automobile financing companies, rely on an individual's credit rating, current income, and assets when deciding to issue a loan. If a potential borrower does not have a credit rating, has bad or mediocre credit, or does not meet the lender's income and asset requirements, the lender may agree to extend a loan if the borrower can find a cosigner. The loan is then issued on the strength of the cosigner's credit and finances. This means that a borrower can buy a home or car or use a cash loan for a needed purpose.
In some cases, a potential borrower may actually qualify for a loan, but because of his financial or credit situation, may not be able to get the interest rate that he wants or the loan terms that he desires. By having a cosigner, he may be able to get a loan with a lower interest rate, fewer fees, and a more favorable payment schedule. Over time, this can represent significant savings on the loan.
As lenders typically report a cosigned loan to credit bureaus and this information appears on the credit reports of both borrower and cosigner, a borrower who is responsible in making his loan payments can see significant improvements in his credit rating. This is because credit score formulas generally take into consideration a person's current history of paying off financial obligations. If the borrower values his relationship with the cosigner, whom he typically knows, he will want to assign priority to repayment of his loan and will not want to do anything that could jeopardize that person's credit. As such, the borrower may be more responsible in paying off his cosigned loan than he has been in meeting other financial obligations in the past.