What to know about getting a personal loan with a co-signer

A co-signer is someone who agrees to repay your debt if you default on a loan or miss a payment. If you’re having trouble qualifying for a personal loan or want a better chance of receiving a lower interest rate, applying with a co-signer (if one is available) could help.

Co-signers are common when the borrower struggles to get approved for a loan based on their credit score, income or existing debt.

The potential downside of getting a personal loan with a co-signer is that you can damage their credit if you miss a payment or default. Before you ask someone to cosign, inform them of the risks and make sure they understand their rights as a co-signer.

What is the difference between a co-signer and a co-borrower?

A loan co-signer is someone who agrees to take financial responsibility for paying off the debt without access to the funds, while a co-borrower has equal rights to the loan funds.

Having a co-signer can reassure the lender that the loan will be repaid. Multiple borrowers are responsible for making payments, versus a single borrower.

How a co-signer affects your credit

A co-signer has no impact on your credit. Whether you use a co-signer to take out a personal loan or get one on your own, it will have the same initial impact on your credit. A lender will perform a hard credit check, which can ding your credit score by up to five points.

That said, getting a co-signer to help you get approved for a personal loan could help you build credit. For example, if you repay your loan on time, it will add positive credit history to your credit reports. As a result, your credit score could increase.

Cosigning a loan can affect the co-signer’s credit score — for better or for worse. The loan will be added to the co-signer’s credit history and impact their credit score. Any late or missed payments on the loan will also have an impact on credit score, dragging it for up to seven years.

Does being a co-signer affect your ability to get a loan?

When thinking about getting a loan with a co-signer, you may be wondering if their ability to access future credit may be affected by cosigning your loan. The short answer is “yes.”

When a person cosigns a loan, the account shows up on their credit report. Additionally, if you fail to meet your repayment obligations, your co-signer’s credit could suffer, which could affect their ability to get the best interest rates available on any future lending products they apply to.

What you should look for in a co-signer

When looking for a co-signer for a personal loan, here are some qualities to keep in mind.

  • Good credit. A co-signer with good to excellent credit (670 or above) is more likely to meet a lender’s minimum credit score requirements. The higher the co-signer’s credit score, the lower your interest rate might be.
  • Solid income. Some lenders have minimum income requirements. To increase your chances of getting approved, find someone who meets (and preferably exceeds) the income needed for approval.
  • Low debt-to-income (DTI) ratio. If you can, try to find a co-signer who doesn’t have a lot of debt relative to their income. Lenders sometimes have minimum DTI ratio requirements — the total debt you owe versus your monthly gross income.

When using a co-signer makes sense

Getting a loan with a co-signer can be risky, but it can also be beneficial if done correctly. Here are some examples of when using a co-signer would make sense:

  • You have poor credit: If your credit score is less than 580, it’s considered poor, and it may be harder to get approved for a loan. The lower your credit score, the riskier you’re deemed as a borrower.
  • You don’t meet the minimum income requirements: Some lenders require a minimum income. If you don’t meet the minimum at the time of application, a co-signer can help bridge that gap.
  • You’re self-employed: If you’re self-employed and don’t have a stable, predictable income, it can be difficult to get approved, even if the monthly payments are well within your budget.
  • You’re a young adult and don’t have a steady income or a solid credit history: Not having a financial or credit history can hinder your odds of being approved for a loan. Having a co-signer with an established financial history can help you qualify.
  • You have a high debt-to-income ratio: Your debt-to-income ratio is the amount of debt you owe versus your income. If you have large amounts of debt when you apply for a loan, you may want to consider using a co-signer.

“Cosigning or coborrowing a loan is really only something you should do if you’re prepared to pay back the debt,” says Lauren Anastasio, CFP at SoFi. “Being a co-signer or co-borrower for a loved one or business partner can lower their cost of borrowing or even help them obtain a loan they wouldn’t otherwise qualify for, but that only happens because the lender will hold you responsible for the debt if anything goes wrong.”

How having a co-signer can affect your relationship

Asking someone to cosign a loan for you is a significant decision. It can put a strain on your relationship with that individual if you face financial challenges down the road and default on your loan.

It’s important to think carefully about who you will ask to take on such a responsibility. Select someone you have a good relationship with and with whom you can have honest conversations.

Ideally, you will pick someone you trust and who trusts you. Because ultimately, both you and the co-signer need to feel good about the agreement and be on the same page about the financial responsibilities involved.

Alternatives to cosigning

If you can’t find a willing co-signer or want to avoid the risks associated with cosigning, here are four alternative options to consider.

Build your credit

If you don’t mind waiting, improving your credit score before applying could help you qualify for a personal loan without a co-signer. Here are three actions you can take to build or rebuild credit.

  • Repay your bills on time. Your payment history accounts for 35 percent of your FICO score. Repaying debt on time adds positive credit history to your reports, which could raise your credit score over time.
  • Consider a secured credit card. A secured credit card is one designed to help you build credit. Unlike a traditional credit card, a credit card issuer requires a deposit that helps establish your credit limit. As you repay your loan, it helps you build credit.
  • Review your credit reports. Credit reports can contain errors. If you have a mistake on your report, such as an incorrect balance reported, it could drop your credit score. To catch and fix any potential mistakes, review your credit reports from the major credit bureaus — Equifax, TransUnion and Experian — at least once a year by visiting AnnualCreditReport.com.

Get a secured personal loan

Some lenders offer secured personal loans. Unlike an unsecured personal loan, it has an asset attached, such as a bank account or car, which a lender can seize if you don’t repay. This means it is less risky to the lender than an unsecured loan. As a result, you may have an easier time qualifying for one versus a traditional personal loan.

Find a bad credit lender

Although it can be tough to qualify for a personal loan with a bad credit score on your own, some lenders offer bad credit loans. For example, some online lenders allow applicants to qualify with scores as low as 580. However, a major downside of these loans is that you could receive an interest rate greater than 35 percent.

The bottom line

If you’re having trouble qualifying for a loan on your own, enlisting a co-signer could be a viable option. Before accepting the loan offer, have an honest discussion about the loan amount, terms and repayment plan with your co-signer. If you have contingencies in place, it’s less likely that your relationship will be at risk down the line.

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