At a Glance
Getting approved for a personal loan can be difficult if you have no credit or bad credit. If you don’t qualify for a loan on your own, you can apply with a co-signer or co-borrower.
In this article, you’ll learn about:
Guidelines for working with a cosigner or coborrower:
- How cosigner works
- Why is a cosigner required
- Pros and cons of adding a cosigner
- Who makes a good cosigner
- Factors to consider before getting a cosigner
- Best practices for taking out a loan with a cosigner
- Co-signer vs. Co-borrower
- Finding a co-signer
- Comparing personal loan lenders allowing a co-signer
- How to apply for co-signer loans
- Alternatives to getting a co-signer loan
A co-signer is a trusted friend or family member who helps you apply and get approved for a loan. When cosigning on a loan, they are essentially taking legal responsibility for paying the loan back if you are unable to. When you have a co-signer, their credit score and other factors are also considered when determining whether your loan is approved.
Adding a cosigner to a personal loan can help improve the likelihood of your application getting approved.
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How does a co-signer work?
When you get a loan with a co-signer, they agree to take legal responsibility for the loan. This means they agree to make monthly payments if you stop making payments.
Even though they are liable for the debt, they do not have legal rights or ownership to anything purchased with the money. For example, if you use a personal loan to purchase a used vehicle, they don’t have rights to that vehicle. This is true unless you title the used vehicle in both of your names.
When you have a co-signer, the loan appears on both of your credit reports. If you miss payments, both your and your cosigner’s credit history will be impacted negatively.
Related: Co-signer rights
Why do you need a co-signer?
Lenders have certain requirements, such as a minimum credit score or a minimum income level to get approved for a loan. If you don’t have a great credit score, credit history, or income, or there’s another reason making it difficult to get a loan, a co-signer can help the lender feel more comfortable in extending you the loan. Because someone else is pledging to repay the loan if you don’t, the loan is considered less risky.
Even if you have a fair or good credit score, a co-signer may help you qualify for a lower interest rate. This will vary based on the lender as well as the stated use of funds.
Pros and cons of adding a cosigner
Who makes a good cosigner?
Not everyone makes a good co-signer, and no one is required to agree to be one. A cosigner can be a friend, family member, or spouse. They should:
- Have great to excellent credit (at least 680 or above, but the higher the better).
- Be able to afford the monthly loan payments if you’re unable to make them, and prove they have sufficient income to make those payments.
- Understand by cosigning, they are taking on more debt and their credit score and credit history will be impacted.
Ideally, the cosigner has a debt-to-income ratio (“DTI”) less than 40% before taking on additional loans. Calculating this ratio before co-signing is a smart move.
What to consider before getting a cosigner?
Asking someone to be a co-signer on a loan is a big ask. There are several things to think about before asking someone to be your co-signer:
1. Understand the financial risk you both are taking on. A loan is debt, and while you may apply for a loan believing you’ll be able to make the payments on time each month, late or missed payments can still occur. While missing one payment doesn’t seem like the end of the world, it doesn’t just impact your credit score – it will also affect your co-signer. It will also stay on both of your credit reports for seven years.
2. They may always be on the loan. Removing your co-signer from the loan, (sometimes called a “cosigner release”), means you’re releasing them from the responsibility of the loan. Once they are removed, they are no longer held accountable for paying it off if you can’t. However, not all lenders offer this option, and you may have to refinance or consolidate your debt instead. Depending on the loan term, your co-signer may be impacted by this debt for a long time.
3. Not all lenders allow co–signers. Most places you’d get a loan, including banks, credit unions, and online lenders, allow co-signers. However, some institutions don’t, so if you think you’ll need a co-signer, be sure that’s an option before applying for the loan.
4. Consider your relationship. No matter who you ask to co-sign your loan, you should carefully consider your relationship with the individual. The co-signer should be someone that has been and will be in your life for a long time, and who has a history of managing their money appropriately. You should also consider what would happen and how your relationship would be impacted if they end up having to pay off the loan.
Best practices for taking out a loan with a cosigner
There are ways to avoid potential problems with co-signers. Keep these in mind when you’re applying and throughout the loan term.
1. Consider alternatives
Even before exploring the option of getting a loan with a co-signer, you’ll want to explore all of your opinions for financing and consider alternatives.
You should also try to get prequalified for loans to see if you qualify without a co-signer.
2. Choose the right person
Asking someone to be a co-signer on a loan can be daunting, especially because you’re asking them to take legal responsibility for this loan and pay it back if you can’t. Be sure you choose someone you can trust and who trusts you; the person should have excellent credit and/or a strong income.
3. Lay out the details
Talk to your co-signer. Make sure they understand the risks involved, the payment requirements, and the impact on their ability to borrow in the future. Even if you have the best intentions to pay off the loan, surprises can arise. Make sure the co-signer can comfortably make payments if you’re unable to for any reason.
4. Communication is key
If you know you’re not going to be able to make a payment, reach out to the co-signer and discuss the best way to move forward before the payment is actually due. Not only can this help prevent damage to your credit, but it can also help prevent an even more uncomfortable conversation later.
The co-signer may choose to help you make the payment rather than have you miss making the payment. A missed payment can lead to an accumulation of fees and hurt both of your credit scores.
What’s the difference between a cosigner and coborrower?
A co-applicant can not only improve your chances of being approved, but also help you get a lower interest rate and/or a higher loan amount.
Both co-signers and co-borrowers can act as a co-applicant. A lender looks at both your credit history and income as well as that of either a co-signer or co-borrower to approve or deny your loan request.
How to find a cosigner?
Your co-signer should be someone with good to excellent credit. On the FICO credit scale, an excellent credit score is anything over 800 (850 is the highest score possible). 700 or higher is typically considered a good credit score.
Family members or close friends are often the most likely to co-sign a loan with you because they’re taking on an element of risk, and they might only be willing to do so for someone they love and care for. If you stop making payments or miss a payment, your co-signer is responsible and their credit can suffer.
Of course, there’s also risk involved on your end. Borrowing money from family or friends can strain relationships. Be sure you understand the nonfinancial risks involved when it comes to asking someone to co-sign your loan.
How to compare personal loan lenders allowing a co-signer?
Before applying for any loans, be sure to do your research and compare different lenders that allow co-signers to get an idea of what you qualify for. When possible, get prequalified (which won’t impact your credit score) for a more personalized projection of loan terms.
When comparing lenders, a few factors to consider include:
1. APR: Annual percentage rate combines the loan’s stated interest rate with fees and other costs associated with the loan. Look for a reputable lender with the lowest APR for which you qualify.
2. Minimums: Know if you meet the lender’s minimum credit score, income, and other requirements.
3. Fees: Some lenders charge origination fees, late payment fees, prepayment penalties, among others.
4. Loan amounts: Make sure the lender offers the loan amount you need, but also only borrow as much as you need and no more.
5. Term: Ashorter loan terms means less interest, but you’ll pay more each month, all else equal. Longer loan terms have lower monthly payments but accrue more interest over time. Choose a term that you can reasonably afford.
6. Application, approval, and funding process: Completing loan applications online can make the overall process faster. Compare approval and funding times to make the process more efficient.
7. Customer service: Read reviews and ratings from current and past customers. Make sure the customer service team is able to meets your needs in the event you have questions or need help.
How to apply for a personal loan with a co-signer?
Applying for a personal loan with a co-signer is very similar to how you’d apply for one without a co-signer. After you’ve gotten prequalified, compared lenders, and found the right loan for you, the next step is to gather the following documents, either in hard copy or digital format:
- Valid State Driver’s License or State ID
- Proof of current employment (paystubs)
- Valid checking account for direct debits
- Most recent W2 or 1099
Getting this information ahead of time can make the application process easier. Then, you’ll fill out the application (either online or in person). Answer the questions and provide the requested information for both you and your co-signer.
If you’re approved, the lender will send you the loan terms and conditions, which you should carefully read before signing. The lender will then transfer the funds to your bank account, and you’ll start making the monthly payments to repay the loan.
Alternatives to getting a loan with a cosigner
Getting a loan with a co-signer isn’t the right move for everyone. Some alternatives include:
1. Wait. If you don’t need the financing immediately and can wait to apply for your loan, using additional time to improve your credit score may be the optimal strategy. Pay your bills on time and try to pay down debt to increase your credit score. The higher your credit score, the more likely you are to be approved for a loan without a co-signer.
2. Borrow less. In some cases, reducing the amount you want to borrow can help improve your approval odds. For example, while lenders may not feel confident that you can repay $25,000, they may feel better about lending you $10,000.
3. Apply for a secured loan. Most personal loans are unsecured, but if you don’t have great credit, a secured loan can be an option. These loans are backed by collateral, which can be an asset like a house, car, savings account, or other asset of value. If you don’t repay the loan, the lender can seize that collateral.
4. Use a credit card. Depending on the amount you need to borrow, you may be able to use a credit card to pay for it. However, you don’t want to carry a large balance on your card because it will quickly accrue interest, so look for a 0% introductory APR credit card. Keep in mind that you should pay off the balance before the introductory period is over, though, because otherwise you’ll be hit with a big interest charge.
Yes, it’s generally easier to get a loan with a co-signer. That’s because a co-signer must have great- to excellent credit and a steady income, making the loan less risky for the lender. Plus, the co-signer is taking responsibility for paying back the loan if you can’t.
Typically, both borrowers and co-signers are required to provide the same information, including proof of income and/or employment information. Co-signers will also need to meet the credit score requirements.
Yes, it’s best that a co-signer has good- to- excellent credit (680 and above). The higher their score, the more likely that they will be accepted as a co-signer and your application will be approved. If a co-signer doesn’t have good credit, the lender may not accept their guarantee of payment.
Typically no. Lenders require co-signers to have both great credit and income. Otherwise, the lender may not feel the risk is worth it.
Yes, the loan you co-sign for will show up on your credit history and will affect your debt-to-income ratio. Additionally, if loan payments are late or missed, your credit score will be affected.
Yes, a co-signer’s credit score will be impacted by taking out the loan and co-signing. The co-signer’s credit score will also be negatively impacted if a payment is late or missed.
If you can’t pay back your co-signed loan, your cosigner is legally responsible for repayment. They must start making the monthly payments until the loan is paid off in full. Otherwise, the loan will go to collections.
Yes, bringing a co-signer who has strong credit onto your credit application can potentially get the loan approved. However, be aware that if you default on the payments then your co-signer is equally as liable for the debt, so ensure your co-signer is someone you know and trust.