Cosigning Vs. Collateral: Which Is the Better Path

The average American has a liability of $38,000 in terms of personal loans, according to CNBC. While most might be on the verge of clearing their debt, the fact remains that this debt prevents them from gaining access to more credit. In the eyes of the typical lender, taking on more debt on top of this might mean that some might default.

Luckily, this doesn’t have to shatter your dreams since most lenders accept cosigning or collateral as a sign that you will fulfill your end of the bargain. While these two methods increase your chance of getting a loan, both have their own risks.

Here is a comparison of the two options:

Using Collateral In A Nutshell

Collateral is a tangible and valuable asset that you offer as a sign of goodwill that you will not default on your loan. In case you default, the bank or your lender will have to sell your asset to recover the balance. For instance, it can come in the form of car title loans California where your car will play the role of the collateral.

Pros and Cons of Using Collateral

Collateral will easily increase your chances of getting accepted for a loan even if the lenders had at first denied your application for an unsecured loan. Other than increasing the speed of loan approval, this also has the ability to reduce the interest rate that you will get to pay the lender. In some cases, you might also manage to negotiate for a larger loan amount than when applying for a secured loan as the risk of default is smaller from the lender’s perspective.

The downside of this option is that most people tend to overvalue their asset by ignoring depreciation, only to get surprised later on. On the other hand, failing to be realistic about your ability to pay back the loan might result in the repercussions of losing your asset to the lenders. As such, be sure to assess your ability to pay back the loan before taking it out.

If your asset might be way more valuable than the loan amount, don’t be tempted to apply for a bigger loan than you need. Lastly, this option will not be available to you if you do not have a valuable asset.

Working with a Cosigner

In this option, you will need to apply for a loan with the help of a friend or a family member. While they will not be responsible for paying back the loan unless you default, their credit score will be affected upon failure to make monthly payments. The best cosigner would be someone you trust with a great credit score as well as a lengthy credit history to increase your chances of getting accepted for the loan.

The Pros and Cons

Since the cosigner will have a better credit score than yours, you will have a higher chance of securing a loan larger than you would have managed to on your own. While the interest rates you pay for the loan will be lower, committing to timely repayment will increase your credit score. This way, the next time you apply for a loan, you might not even need the help of the cosigner.

However, this option can easily damage your relationship with the cosigner especially if you default. Other than the lenders suing you, they may sue the cosigner if they too cannot manage to pay back the loan. Additionally, since the loan is evaluated using both the assets of the cosigner and yours, the chances of qualifying for a loan above your ability to pay back is quite high. To be safe, do not take out a loan that is beyond your means.


None of these options is risk-free. It all trickles down to the risks you are willing to take. Consider your financial situation before making a choice to avoid experiencing dire consequences.