How Using a Cosigner Can Help You Get a Personal Loan
- 7 min read
- Having a cosigner could make it easier to get approved for personal loans.
- Several lenders offer personal loans with a cosigner.
- Cosigning a loan means taking on some financial risk.
Table of Contents
- When should I use a cosigner on a personal loan?
- What is the difference between a cosigner and a co-borrower?
- Can you get better rates with a cosigner?
- Who can be a cosigner
- 3 reasons to use a cosigner
- What a cosigner or co-borrower needs to know before signing on a personal loan
- Pros and cons of cosigned personal loans
Personal loans can offer flexible funding when you need cash for emergencies, debt consolidation, or other expenses. Getting approved for a personal loan is easier if you have a strong credit history. If you don’t, your options may be more limited.
Applying for a personal loan with a cosigner could make it easier to get approved and help you snag a great interest rate while you're at it. Choosing the right person to cosign is the first step. The next is finding lenders that offer personal loans with a cosigner.
When should I use a cosigner on a personal loan?
Using a cosigner for a personal loan typically makes sense in one of two scenarios:
- When you have bad credit or poor credit
- When you have no credit at all
Getting a personal loan when you have bad credit is not impossible. There are lenders that offer bad credit personal loans. However, you might pay a lot in interest for the loan.
When someone cosigns a loan, they agree to allow a lender to check their credit scores and income. Those are two of the main criteria for personal loan approval. Having a cosigner with good credit could help you to qualify for a lower rate.
If you don't have a credit score because you're just starting to build credit, that could make getting a personal loan even more difficult. In that case, having a cosigner could make you seem less risky to a lender and allow you to get approved.
What is the difference between a cosigner and a co-borrower?
Cosigners and co-borrowers are similar in certain ways, since they both apply for a loan with someone else. The difference lies in how they treat the loan once it's granted by the lender.
Generally, a cosigner allows their credit scores to be used for loan approval. They also sign off on the loan paperwork, and agree to take responsibility for repaying the loan if the primary borrower defaults. But a cosigner usually doesn't receive any of the loan funds, nor do they make payments toward the loan. An example is a private student loan, where the parent cosigns but the student is expected to repay the amount borrowed.
A co-borrower or joint borrower, on the other hand, could have access to the loan proceeds. For example, if you're married and your spouse is a co-borrower with you on a personal loan, you might have the proceeds deposited into your joint bank account. You could both use the money to pay off credit cards, cover home repairs, or fund other expenses. Co-borrowers may also share in the repayment of the loan.
In terms of legal responsibility for the debt, it's the same for cosigners and co-borrowers. If someone cosigns a loan for you and you stop making payments, the lender can go after them for the amount owed. Likewise, co-borrowers would be held equally liable for the debt if one or both of them stop making payments.
Can you get better rates with a cosigner?
The rate you pay largely depends on your creditworthiness. If your cosigner improves your creditworthiness, you might get a better rate.
Getting a personal loan with a cosigner could help you get a better interest rate if your cosigner has good or excellent credit. A lender might be offering rates in the 8% range for people with excellent credit, but someone with poor credit might end up with a rate of 20% or higher instead.
That could make a huge difference in how much interest you pay over time. For example, say you want to borrow $10,000 to make some home repairs. You get approved for a 36-month loan with a cosigner at 8%. Your monthly payment would come to $313 and you'd pay $1,281 in interest.
Now, say you get the same loan without a cosigner at 20% instead. Your monthly payment is $372 and the total interest paid climbs to $3,379. That's a difference of $59 per month for a total of $2,100 in interest. In this case, getting a personal loan with a cosigner could save you money.
Who can be a cosigner
Generally, anyone can be a cosigner including parents, siblings, other relatives, spouses, significant others, friends, or even coworkers. However, it's usually not wise to let just anyone be a cosigner on your loan. Someone with poor credit likely wouldn't be a great candidate, as their credit history might not do much to improve your chances of being approved.
Lenders might specify who can or can't cosign a loan for you or be listed as a co-borrower. Not all lenders allow cosigners either.
You’ll have to shop around to find lenders who look like they can meet your loan needs. While you're looking for personal loans with a cosigner, compare loan rates, fees, borrowing limits, and repayment terms.
3 reasons to use a cosigner
There are some situations where it could make sense to get a personal loan with a cosigner, such as if you:
- Have a thin or nonexistent credit file. A thin credit file means you don't have enough credit data in your file to generate a credit score. If you're new to using credit and you need a personal loan, that could be a good reason to seek out a cosigner.
- Have bad or poor credit. Bad credit can make getting approved for loans more difficult. If you're working on improving your credit score, you may need to get a cosigner for loans in the meantime.
- Want to get a lower rate. Applying for personal loans with a cosigner could help you to qualify for lower interest rates if the cosigner has good credit.
If you're not able to find someone to cosign a personal loan, you could still try to get approved on your own. You could also look into no credit check loans; however, those can be very costly.
What a cosigner or co-borrower needs to know before signing on a personal loan
Cosigning a loan or acting as a co-borrower involves more than just signing your name to the loan documents. Once your name is on the loan, you're legally responsible for the debt.
If the loan falls into default because the other borrower stops making payments, there are several things that could happen:
- You could receive collection calls or letters from the lender or from a debt collector.
- Late or missed payments could show up on your credit reports, costing you points from your credit score.
- Collections could be listed on your credit history if the debt is sold to a collection agency, which can cause even more credit score damage.
- You could be sued in civil court for the remaining balance due, which can be time-consuming and costly.
- If a creditor wins a civil judgment, your wages could be garnished or your bank accounts levied to repay the debt.
In other words, cosigning a loan could backfire if the borrower doesn't pay. So it's important to know the risks before agreeing to cosign or co-borrow a personal loan. If you're worried that the other borrower might not be able to follow through on their end of the bargain, you may want to turn down their request.
Pros and cons of cosigned personal loans
Cosigned personal loans can offer advantages for the borrower, but there are some potential downsides to keep in mind. Here's a quick glance at how the pros and cons compare.
- May be easier to get approved if you have bad credit or no credit
- You may be able to get a lower interest rate if your cosigner has a strong credit score
- You might be able to get a larger loan if you have a creditworthy cosigner
- Cosigners take a financial and credit score risk
- Lower interest rates are not always guaranteed
- Not all lenders offer personal loans with a cosigner
What credit score does a cosigner need for a personal loan?
The credit score a cosigner needs for a personal loan will typically depend on the lender. Generally, cosigners need to have a good credit score to get approved. A good FICO score is a score of 670 or higher.
Will cosigning hurt the cosigner’s or co-borrower’s credit score?
Anytime you apply for a loan, even as a cosigner, your credit score can drop by a few points. Cosigning a loan could also hurt the cosigner or co-borrower's credit score if the loan ends up in default. Late or missed payments are reflected on both signers' credit reports when a cosigned loan goes unpaid.
How much can I borrow with a cosigner?
Lenders that offer personal loans with a cosigner can determine how much you'll be able to borrow. In general, personal loans can range from $1,000 at the low end to $100,000 at the high end. Along with credit scores, lenders typically also look at income and debt-to-income (DTI) ratios when approving cosigned personal loans.
Can you be denied a personal loan with a cosigner?
Yes, you could be denied a personal loan even if you have a cosigner if both of you fail to meet the lender's minimum qualification requirements. For example, if your cosigner has a great credit score but no verifiable income, that might be a red flag to the lender. Or you might be denied if you're requesting a larger loan than the lender is willing to grant.
What is a personal joint loan?
A personal joint loan is a personal loan that has two co-borrowers. Both borrowers can have access to loan funds and they're also equally responsible for repaying the debt.