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 cosigner or coborrower.
Guidelines for working with a cosigner or coborrower:
What’s the difference between a cosigner and coborrower?
A coapplicant can not only improve your chances of being approved, but also help you get a lower interest rate or higher loan amount.
Both cosigners and coborrowers can act as that coapplicant, though the terms are slightly different. A lender looks at both your credit history and income as well as the credit history and income of either a cosigner or coborrower to approve or deny your loan request.
A cosigner backs your personal loan while you alone are responsible for repayment. The cosigner takes the financial risk if you default on the loan. Essentially, the cosigner assures the lender that someone will repay the loan if you don’t.
A cosigner does not have access to the money you’re borrowing or information about the loan, like whether you’ve missed a payment.
A coborrower is a joint applicant on the loan who will share the funds. A coborrower is also responsible for making monthly payments.
How to find a cosigner or coborrower
Your cosigner or coborrower 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 cosign a loan with you because they’re taking on an element of risk. If you stop making payments or miss a payment, your cosigner or coborrower 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. Make sure you find the right person, or consider alternatives to adding a coapplicant.
The benefits of a cosigner
A cosigner can help you get a loan you wouldn’t otherwise qualify for, and they can possibly help you save money in the long run with a better rate.
How much a cosigner can help depends on several factors:
- Their credit score
- Your credit histories
- Your combined debt-to-income ratio
- Lender’s criteria
Let’s say for example that you applied and were approved for a $20,000 five-year loan with an interest rate of 18% on your own based on your income and credit score. Over the course of the loan, you would pay more than $10,000 in interest for a total of over $30,000.
Now, if you brought in a cosigner with a higher income and better credit score, let’s say you were approved for the same loan but at a rate of 10%. You would save almost $5,000 with a cosigner.
There can also be downsides to using a cosigner. Your credit and your cosigner’s credit will suffer if you miss a payment, potentially damaging your relationship with the cosigner. You could also hurt the cosigner’s ability to borrow for other needs.
The benefits of a coborrower
Like cosigners, coborrowers may be able to help you get a better rate on a loan. The caveat is, depending on the lender, both of you may need to meet the minimum credit score requirement. The minimum may be lower if you’re applying with a coborrower than it would be if you were applying on your own, though.
Best practices for taking out a loan with a cosigner
There are ways to avoid potential problems with cosigners. Keep these in mind when you’re applying and throughout the terms of the loan.
Make it as temporary as possible
As with any loan, you want to pay off your debt quickly. And with a cosigner, you want to get them off the hook as soon as possible. Try to borrow from a lender that allows for a cosigner release, so your cosigner’s name can come off the loan after you’ve made a certain number of payments.
If a release is unavailable, you may want to consider refinancing into a new loan obtained on your own whenever possible.
Lay out the details
Talk to your cosigner. 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 cosigner can comfortably make payments if you’re unable to for any reason.
Communication is key
If you know you’re not going to be able to make a payment, reach out to the cosigner 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 cosigner may choose to help you make the payment rather than have you miss making the payment. A missed payment can lead to fees and hurt both of your credit scores.