Cosigner Question

[Kait]

If you apply for your private loans with a cosigner, does the lender run a credit check on both parties (the cosigner as well as the borrower) or just the cosigner?

Also, if both are run, how are the two scores used to determine interest rates? Is the cosigner's score used to give you better interest rates on the loan or is some sort of middle ground between the two scores used to determine the interest rate of your private loan?

Any insight would be great, thanks!

[COmom]

The first answer is yes - a credit check is done on the co-signer.  Don't know about the second...

[bruin]

Many of the lenders I have noticed charge a higher rate to borrowers using a co-signer. Strange.

[J D]

How does that make any sense?  The whole point of having a cosigner is that s/he is obligated to pay the balance of the loan should the borrower be unable to pay.  So, the interest rate (insofar as it is a measure of the risk/creditworthiness of the borrower) should be based largely on the cosigner's credit.  After all, if the lender's prediction about the borrower is correct (i.e. that their bad credit means they probably won't be able to return our money to us, so there's no way in hell we're authorizing a loan absent a cosigner), then most likely it'll be the cosigner who ends up paying the loan anyway; why shouldn't the terms of the loan be based on the cosigner's credit?

[bruin]

I agree, Wells Fargo, for one, does not.

[Are we there yet?]

Let's keep in mind that although one might assume that a cosigner being present increases the likelihood of repayment, individual lender experience may vary. If an individual lender has had difficulty securing repayment from borrowers using cosigners, subsequent interest rates will reflect that, since the "default-risk premium" is a factor in those rates.