SoFi

Being the cosigner on a loan is a commitment that shouldn’t be taken lightly. It may be tempting to help out a loved one by agreeing to be their financial backup, but you could be putting your own credit reputation in jeopardy if the primary borrower on the loan doesn’t follow through on his or her obligation.

Here’s what you need to know before you sign on that dotted line.

What Is a Cosigner?

If someone isn’t a good candidate for a loan, a lender may allow them to add a better-qualified cosigner to their application. This can help a high-risk borrower improve their chances for getting a loan or better loan terms. Plus, cosigning can help the cosigner and primary borrower build credit.

Essentially, a cosigner agrees to take over financial obligations should the main borrower miss payments or default on the loan. They won’t get the borrowed funds, and if the loan is used to purchase an asset, like a car or home, they won’t be listed as a co-owner. But they are just as responsible as the main borrower for making sure the debt is paid.

This is a different arrangement from using a co-borrower, where that person takes on the loan with the main borrower and has part ownership in whatever the loan buys.

Primary Responsibilities of a Cosigner

What is the responsibility of a cosigner on a loan? Being a cosigner means you’re willing to accept two important roles. Let’s take a closer look at both.

Financial Obligation

It’s important to fully understand your financial obligation before accepting the role of cosigner.
To be clear, you aren’t just serving as a character witness, telling the lender that you trust your friend or loved one will make good on the loan. You’re signing an agreement that says you’ll pay if he or she doesn’t.

This means if the primary borrower is delinquent, you should be ready for the lender to come to you for the missing payment or payments. And if the borrower defaults, the lender may ask you for the balance. You also may have to pay any late fees or collection costs.

If you can’t fulfill your role as cosigner, the lender can use the same methods to collect as it would with a primary borrower, which includes taking you to court.

Credit Risk

Cosigning a loan can have the same effect on your credit as if you applied for and got the loan for yourself.

A lender will likely perform a hard credit inquiry, which can lower your credit score temporarily by just a few points. And the account can show up on your credit reports, just as it does for the main borrower. That means it can potentially impact your credit scores, your future borrowing, and your own financial goals.

Types of Loans That May Require a Cosigner

Although most major credit card issuers don’t accept cosigners, lenders will allow a cosigner on many different types of debt if a borrower’s application needs a boost. Examples include:

•   Student loans

•   Mortgages

•   Leases

•   Auto loans

•   Personal loans

No matter the type of loan, it’s a good idea to consider the potential risks before agreeing to cosign.

Recommended: Personal Loan Guide

Legal Implications of Cosigning

When you’re the cosigner on a loan, you’re signing a contract that outlines your legal obligations and the consequences if you don’t follow through on your commitment. This includes making monthly payments if for some reason the primary borrower won’t or can’t.

In this way, the arrangement is different for a guarantor vs. cosigner: A guarantor is only responsible if the borrower defaults, while a cosigner is responsible if the borrower misses one payment.

It may feel awkward, but as a cosigner, it’s your responsibility to monitor the account and ensure payments are made on time — even if the borrower or the lender doesn’t notify you that there’s a problem.

It’s also important to note that, depending on state law, the lender may decide to sue a cosigner for late payments or even the full amount due before trying to collect from the main borrower. A lender also may take action to collect from a cosigner before moving to take the car, home, or other asset that’s being used as collateral to secure a loan.

Impact on the Cosigner’s Credit

When someone offers to cosign a loan, it’s usually with the intention of helping out a person they care for until that person can establish their own good credit reputation. But if all goes well, the cosigner could benefit, too.

If the main borrower stays on track and makes timely payments, and those favorable account updates appear on the cosigner’s credit reports every month, it could result in a boost to the cosigner’s credit score.

The big drawback, of course, is that any negative information (such as late or missed payments or if the debt goes to collections) can also affect the cosigner’s credit. And even if the main borrower does everything right, becoming a cosigner can affect your debt-to-income (DTI) ratio and your credit utilization. This, in turn, could impact the interest rate or other terms you’re offered if you apply for your own loan or credit card down the road.

Additional Risks of Being a Cosigner

Along with the financial risk and the potential impact on your credit, it’s important to consider the effect cosigning a loan might have on your personal connection with the main borrower. You both may go into the arrangement with the best intentions, but if things go sideways, it could put stress on even the strongest relationship. A serious conversation about your expectations — and theirs — may help.

Remember: Even though you aren’t directly giving that person the funds they need, you are lending him or her your good credit reputation for the length of the loan. And you’ll both have to deal with the fallout if the arrangement doesn’t work out.

Do Cosigners Have Any Rights?

Before you cosign most types of loans, you are entitled to receive a separate disclosure that outlines your rights and obligations. This document, labeled “Notice to Cosigner,” is required under the Federal Trade Commission (FTC) Credit Practices Rule, and it includes warnings about your financial commitment, your credit risk, and potential debt collection methods.

After you cosign, you have the right to ask for updates about the loan’s payment history and outstanding balance at any time.

How to Protect Yourself as a Cosigner

Here are a few steps that could help you safeguard yourself and your relationship with the main borrower before agreeing to cosign on a loan:

•   Talk to the main borrower about their current finances. Are you sure they can cover the monthly loan payments along with their other obligations? Are you clear about what the money will be used for, the total amount being borrowed, and why a cosigner is needed? A personal loan calculator can help you determine what the monthly payments might be, depending on the interest rate and loan term.

•   Ask the main borrower for progress updates. Since it will be your responsibility as a cosigner to ensure payments stay on track, discuss how you can monitor the main borrower’s progress in a way that works for both of you.

•   Ask the lender to keep you in the loop. If you want to receive copies of loan statements, let the lender know. And be sure that you’ll be notified ASAP if there are late or missed payments.

•   Carefully read the “Notice to Cosigner.” This brief document can help you understand your rights and obligations.

•   Get copies of all relevant loan documents. Keep any important paperwork handy so you can refer to it when necessary.

•   Keep an eye on your credit. Your bank, credit card company, or a money tracker app may allow you to check your credit score for free. And you can go to AnnualCreditReport.com to get free credit reports from each of the three major credit bureaus.

Alternatives to Cosigning

If you aren’t comfortable with the risks involved with cosigning, here are some alternatives you may want to consider:

•   Take out the loan yourself and ask your loved one to repay you. Although there’s still a risk that you won’t get all your money back, as long as you stay on track with your loan payments, your credit will stay intact.

•   Fund the loan from your own savings. If you have the means to lend the money directly to your loved one, a family loan can remove credit risk from the borrowing equation. Unfortunately, bypassing the lender also eliminates both the borrower and cosigner’s opportunity to build credit through timely payments. To keep things more formal, and help avoid default risk, you can write up a payment plan and charge interest as part of your agreement.

•   Just say no. If you aren’t comfortable with a cosigning arrangement, it may make sense to follow your gut and turn down the request.

Removing Yourself as Cosigner

Getting your name off a loan you’ve cosigned can be extremely difficult, which is yet another good reason to give the arrangement a lot of thought before you agree to it. Here are some options to explore:

•   Cosigner release: Student loan borrowers may have more luck applying for a cosigner release than other types of borrowers. But even if it’s an option (which you should be sure of before cosigning), the primary borrower still will have to agree to it and meet certain criteria before applying for the release. And the lender will have to approve it, too.

•   Refinancing the loan: With this option, the old loan is paid off and the primary borrower gets a whole new loan that doesn’t require the current cosigner.

•   Paying off the loan: If it’s a secured loan, such as a home or car loan, the borrower could agree to sell the asset and pay off the loan, removing the cosigner from any financial responsibility. If it’s an unsecured loan, and the main borrower or the cosigner has the means to pay it off early, they might decide to do so in order to end the arrangement and move on.

Recommended: Average Personal Loan Interest Rates and What Affects Them

The Takeaway

Agreeing to cosign a loan for a friend or loved one is a generous act. But even in a best-case scenario, it can be a lopsided arrangement, with the cosigner taking on most of the risk and the primary borrower seeing most of the benefits.

If you decide to go forward, it’s important to find a loan that fits the borrower’s budget to improve the chances of their success. As a cosigner, it also can be helpful to monitor payment progress as well as any changes to your own credit score.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What happens if the primary borrower defaults on the loan?

As a cosigner, you are responsible for making sure the primary borrower’s loan is repaid on time. If the borrower is delinquent or defaults, you can expect the lender to come to you for payment.

Can a cosigner be removed from a loan?

It’s possible but difficult for a cosigner to be removed from a loan. It can be helpful to ask the lender about your options before you agree to cosign.

Does cosigning affect my ability to get my own loans?

Yes. Even in a best-case scenario, where the borrower consistently makes on-time payments, cosigning a loan can affect your credit score, debt-to-income ratio, credit utilization, and other factors that lenders look at when you apply for a loan or credit card.

Photo credit: iStock/DMP

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q424-003

Maybe the asphalt on your driveway is starting to break apart and is more rocky than you’d like. Or perhaps you desire a fresh look and smoother experience going down your driveway.

Whatever the reason, giving your driveway a makeover can add to your home’s overall aesthetic and boost its functionality. Research reveals that 79% of Realtors thought a home’s curb appeal was essential to attracting potential buyers.

That said, driveway paving comes with a hefty price tag. According to estimates from HomeAdvisor, the cost depends on the size and materials, but can be anywhere from $2,000 to $10,000, with $6,000 being the average.

Can you finance a driveway if you don’t have the cash on hand to cover the costs? The good news is yes, it’s entirely possible. In order to figure out the best choice for you, you’ll want to be clued in on your options. Here, we’ll walk you through different ways to pay for a new driveway.

Understanding the Cost of Driveway Paving

Tracking home improvement costs? As mentioned, the average cost of driveway paving is $6,000. The main factors that determine how much you’ll be doling out are the size of your driveway and the type of material you’ll be using. As you might expect, different materials require a different investment of time and labor to install.

For instance, while gravel driveways are the least expensive to install, you’ll need to periodically replenish the gravel — ideally, every few years. On the flip side, driveways made of paved stone have the highest costs initially but can last the longest.

Recommended: Personal Loan Guide

Personal Loans for Driveway Financing

Personal loans can be a relatively easy route to financing a driveway paving. Most personal loan amounts range from a few hundred dollars to up to $50,000, while a few lenders have up to $100,000 available.

The terms of the loan repayment can be anywhere from one to seven years, and the APR, which is typically fixed, ranges between 8% and 36%. As of August 2024, the average interest rate on a 24-month personal loan hovered around 12.33%.

Personal loans usually have lower interest rates than credit cards, but the interest can make for an expensive way to borrow. Plus, there might be upfront fees, such as an origination fee, which is usually anywhere from 1% to 6% of your loan amount, and in some cases as high as 10%. While longer loan terms can mean lower monthly payments, you’ll be paying more interest for the loan.

Some lenders feature preapproval online and can offer a speedy application process that you can also do online. Once you’ve been approved for a personal loan, you may be able to receive the proceeds of the loan as soon as within one business day.

However, you should be aware that a personal loan for home improvement is an installment loan, which means you’ll receive the funds upfront and are responsible for making monthly payments from the start. When you apply, lenders do a hard pull on your credit, negatively impacting your credit score.

Home Equity Loans and HELOCs

If you’re a homeowner, you can borrow against the equity in your home to take out a home equity loan or home equity line of credit (HELOC) to finance a driveway paving. Both are second types of mortgage, so you’re betting against your house. Home equity loans and HELOCs can be good ways to borrow money for a relatively low interest rate and lower fees.

Currently, the average interest rate on a home equity loan is 8.35%, and the average national interest rate on a HELOC is 8.69%.

Like a personal loan, a home equity loan is an installment loan, so you’ll receive the proceeds for the loan in a single lump sum. From there, you’ll have a fixed monthly payment for which you’re on the hook.

A HELOC is a type of revolving loan. Like a credit card, you’ll be approved for a limit and borrow as you need, up to the limit, for the draw period, which usually lasts 10 years. You pay as you go, and might be able to make interest-only payments during the draw period. Because a HELOC lets you borrow funds as needed, it could be a better fit for ongoing or multiple home improvement projects with an undetermined total price tag.

Unlike unsecured forms of credit, home equity loans and HELOCs can be easier to approve. That said, both types of loans require a hard pull of your credit, which may temporarily bring down your credit score by a few points. And because you’re putting up your home as collateral, if you put a halt on your payments, you risk foreclosure and losing your home.

Recommended: The Top Home Improvements to Increase Your Home’s Value

Contractor Financing and Payment Plans

Another option for financing driveway paving is to borrow directly from a contractor. Some contractors partner with a third-party lender that provides financing options. These may include same-as-cash options (which we’ll get to in a bit) or monthly payments that you pay back over the length of the loan.

The pluses of getting financing from a contractor are that it’s convenient and straightforward. The contractor may be able to offer you a flexible plan to meet your needs in financing for driveway paving. The approval process might also be quicker.

However, minuses of contractor financing may include higher interest rates. Plus, you’re tied to the contractor should issues arise during the project.

Credit Cards and Same-as-Cash Options

You can also use a credit card. If you don’t want to jump through the hoops of applying for a new home improvement loan and have a hard pull on your credit, you could use a credit card to finance a new driveway.

That said, credit cards typically have higher interest rates than other types of financing, which ratchet up the costs of your home improvement project. Currently, the average interest rate for credit cards is 21.76%.

Contractors may also offer a “same-as-cash” option. Also known as deferred interest financing, these loans feature a no-interest period, usually between three and six months. However, interest will accrue if you don’t pay off your balance when the promotional period ends. Typical interest rates on “same-as-cash” offers range between 25% to 30%, which makes for an expensive purchase.

If you’re considering the same-as-cash option, you might also want to mull over a zero-balance transfer credit card. Interest also doesn’t accrue on purchases until the end of the promotional period, and these credit cards have zero-interest periods that are up to 20 months, so you could have more time to pay it off.

The Takeaway

Figuring out the best option for financing a driveway improvement means knowing what’s available and weighing the pros and cons of each. Before deciding, estimate how much you anticipate spending on your driveway financing and then pore over your options.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How much does driveway paving typically cost?

It depends on the size of your driveway and the materials used, but driveway paving typically costs anywhere from $2,000 to $10,000, with an average cost of $6,000.

Can I use a home improvement loan for driveway paving?

You can use a home improvement loan for a driveway paving project. You’ll want to look for a loan with the amount needed plus the lowest terms and flexible rates possible.

Are there government programs for driveway improvement financing?

Government home repair assistance programs exist, and you’ll need to check if you qualify for a home improvement loan. Eligibility criteria may include income, age, location, property type, and if you belong to a specific group.

Further, single-family housing repair loans and grants can be available at the state, county, and city levels. You’ll need to check locally to see what’s out there and how to qualify for a loan or grant to spruce up your home.

Photo credit: iStock/irina88w

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q424-005

When investors evaluate which bonds to buy, they often take a look at yield to maturity (YTM), the total rate of return a bond will earn over its life, assuming it has made all interest payments and repaid the principal.

Calculating YTM can be complicated. Doing so takes into account a bond’s face value, current price, number of years to maturity and coupon, or interest payments. It also assumes that all interest payments are reinvested at a constant rate of return. With these figures in hand, they will be better equipped to understand the bond market and which bonds will offer the greatest yield if held to maturity.

What Is Yield to Maturity (YTM)?

The yield to maturity (YTM) is the estimated rate investors earn when holding a bond until it reaches maturity or full value. The YTM is stated as an annual rate and can differ from the stated coupon rate.

The calculations in the yield to maturity formula include the following factors:

•   Coupon rate: Also known as a bond’s interest rate, the coupon rate is the regular payment issuers pay bondholders for the right to borrow their money. The higher the coupon rate, the higher the yield.

•   Face value: A bond’s face value, or par value, is the amount paid to a bondholder at its maturity date.

•   Market price: A bond’s market price refers to how much an investor would have to pay for a bond on the open market currently. The price buyers pay on the secondary market may be higher or lower than a bond’s face value. The higher the price of the bond, the lower the yield.

•   Maturity date: The date when the issuer repays the principal is known as the maturity date.

The YTM formula assumes all coupon payments are made as scheduled, and most calculations assume interest will be reinvested.

How to Calculate Yield to Maturity

Calculating yield to maturity can be done by following a formula — but fair warning, it’s not simple arithmetic!

Yield to Maturity (YTM) Formula

To calculate yield to maturity, investors can use the following YTM formula:

In this calculation:

C = Interest or coupon payment
FV = Face value of the investment
PV = Present value or current price of the investment
t = Years it takes the investment to reach the full value or maturity

Example of YTM Calculation

Here’s an example of how to use the YTM formula.

Suppose there’s a bond with a market price of $800, a face value of $1,000, and a coupon value of $150. The bond will reach maturity in 10 years, with a coupon rate of about 14%.

By using this formula, the estimated yield to maturity would calculate as follows:

The Importance of Yield to Maturity

Knowing a bond’s YTM can help investors compare bonds with various maturity and coupon rates, and ultimately, what their dividend yield could look like. For example, consider two bonds of varying maturity: a five-year bond with a 3% YTM and a 10-year bond with a 2.5% YTM. Investor’s can easily see that the five-year bond is more valuable.

YTM is particularly useful when attempting to compare older bonds sold in a secondary market, which can be priced at a premium or discounted — meaning they cost more or less than the bond’s face value. Understanding the YTM formula also helps investors understand how market conditions can impact their portfolio based on the investment they select. Since yields rise when prices drop (and vice versa) as seen on a yield curve, investors can forecast how their investment will perform.

Additionally, YTM can help investors understand how likely they are to be affected by interest rate risk — the danger that the value of a bond may be adversely affected due to the changes in interest rate. Current YTM is inversely proportional to interest rate risk. That means, the higher the YTM, the less bond prices will be affected should interest rates change, in theory.

Yield to Maturity vs Yield to Call

With a callable, or redeemable bond, issuers can choose to repay the principal amount before the maturity date, halting interest payments early. This throws a bit of a wrench into the YTM calculation. Instead, investors may want to use a yield to call (YTC) calculation. To do so, they can use the YTM calculation, substituting the maturity date for the soonest possible call date.

Typically a bond issuer will call a bond only if it will result in a financial gain. For example, if the interest rate drops below a coupon rate, the issuer may decide to recall the bond to borrow funds at a lower rate. This situation is similar to when interest rates drop and homeowners refinance their home loans.

For investors that use callable bonds for income, yield to call is significant. Suppose the issuer decides to call the bond when the interest rates are lower than when the investor purchases it. If an investor decides to reinvest their payout, they may have a tough time finding a comparable bond that offers the yield they need to support their lifestyle. They may feel it necessary to take on more risk, looking to high-yield bonds.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Yield to Maturity vs Coupon Rate

While a bond’s coupon rate is another important piece of information that investors need to keep in mind, it’s not the same as yield to maturity. The coupon rate tells investors the annual amount of interest that a bond’s owner is set to receive — the two may be the same when a bond is initially purchased, but will likely diverge over time due to changing economic and market conditions.

Limitations of Yield to Maturity

The yield to maturity calculation does have limitations.

Taxes

It’s important to note that YTM calculations exclude taxes. While some bonds, like municipal bonds and U.S. Treasury bonds, may be tax exempt on a federal and state level, most other bonds are taxable. In some cases, a tax-exempt bond may have a lower interest rate but ultimately offer a higher yield once taxes are factored in.

As an investor, it can be especially helpful to consider the after-tax yield rate of return. For example, suppose an investor in the 35% federal tax bracket who doesn’t pay state income taxes is considering investing in either Bond X or Bond Y. Bond X is a tax-exempt bond and pays a 4% interest rate, while Bond Y is taxable and pays 6% interest.

While the 4% yield for Bond X remains the same, the after-tax yield for Bond Y is 3.8%. While it seemed like the less lucrative of the two options up front, Bond X should ultimately yield a higher return after taxes.

Presuppositions

Another YTM limitation is that it makes assumptions about the future that may not necessarily come to fruition. Specifically, it assumes that a bondholder will hang on to the bond until its maturity date, which may or may not actually happen. It also assumes that profits from the investment will be reinvested in a uniform manner — again, that may or may not be the case.

The Takeaway

Using the yield to maturity formula can help investors compare bond options with different coupon and maturity rates, market and par values, and determine which one offers the potential for a higher yield. But calculating the YTM is not an exact science, especially when you’re gauging the return on a callable bond, say, or adding the impact of taxes to the mix.

YTM is just one tool investors can use to determine which bond may best serve their financial needs and goals. One alternative to choosing individual bonds is to invest in bond mutual funds or bond exchange-traded funds (ETFs). Investors can also speak with a financial professional for guidance.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What is a bond’s yield to maturity (YTM)?

A bond’s yield to maturity is the total return an investor can anticipate receiving if the bond is held to its maturity date. YTM calculations assume that all interest payments will be made by the issuer and reinvested by the bondholder at a constant rate of interest.

What is the difference between a bond’s coupon rate and its YTM?

A bond’s coupon, or interest, rate is fixed from the moment an investor buys it. However, the same bond’s YTM can fluctuate over time depending on the price paid for it and other interest prices available on the market. If YTM is lower than the coupon rate, it may indicate that the bond is being sold at a premium to its face value. If it’s lower, it may be that the bond is priced at a discount to face value.

What is yield to maturity and how is it calculated?

Yield to maturity refers to the total return an investor can expect or anticipate from a bond if they hold it to maturity. It’s calculated using variables including the time to maturity, a bond’s face value, its current price, and its coupon rate.

Why is yield to maturity important?

The yield to maturity formula can give investors an idea of what they can expect in terms of returns from their bond holdings. But again, there are some assumptions the calculation takes into account, so an investor’s mileage may vary.

Is a higher YTM better?

A higher YTM may be better under certain circumstances. For example, since a higher YTM may indicate a bond is being sold for less than its face value, it may represent a valuable opportunity to invest. However, if the bond is discounted because the company that offered it is in trouble or interest rates offered by other investments are more appealing, then a high YTM might not be such a good thing. Investors must research investments carefully and understand the full story before they buy.