Getting A Personal Loan With A Co-Signer

If you want a desirable interest rate when handling a personal loan, you’ll need good or excellent credit. If you’re not sure you can qualify for a personal loan with such favorable terms, you might be able to find someone more creditworthy to co-sign a loan with you so you can secure the terms you want – or at least get closer to them.

Whether you’re the loan applicant or the person co-signing, some key items are worth considering before you sign on the dotted line. Let’s explore how getting a personal loan with a co-signer works, and the risks involved for both parties.

What Does It Mean To Get A Personal Loan With A Co-Signer?

You can use personal loans for a variety of purposes, including home improvement projects, debt consolidation and unexpected costs you couldn’t otherwise cover out-of-pocket.

A co-signed personal loan can allow people who wouldn’t qualify for a loan on their own – due to poor credit or financial standing – to obtain funding by adding someone else’s credit score and income to their application. In some cases, adding a qualified co-signer to a loan application can help you be approved for a higher loan amount and lower interest rate, too.

When you co-sign a loan, you become legally responsible for the repayment of that loan. As the co-signer, you also agree to repay the loan if the primary borrower isn’t able to do so.

Who Can Be A Co-Signer?

A co-signer can be anyone, though it’s best to ask somebody you know well, such as a family member, friend, partner or another close acquaintance. Ideal co-signing candidates will have a strong credit score, stable income and a low debt-to-income ratio (DTI).

Co-Signer Vs. Co-Borrower

The biggest difference between a co-signer and a co-borrower is that a co-borrower has equal access to the loan money. A co-signer guarantees that the loan will be repaid even if the borrower defaults, but a co-signer can’t access the loan funds.

How Do Personal Loans With Co-Signers Work?

When you get a personal loan with a co-signer, both parties are typically on the hook for the entire duration of the loan. The co-signer is as legally responsible for repayment as the borrower.

Removing A Co-Signer From A Loan

In some cases, you may be able to apply for a co-signer release, which will allow you to remove your name from the loan if the borrower meets certain requirements, such as making a specified number of on-time payments and meeting the lender’s credit standards.

Co-signer releases are common with private student loans, but you may also have this option on other types of loans. Before signing any loan agreements, talk with the lender or read your loan documents to find out if you have this option as a co-signer.

Another way to remove your name from a loan before it’s paid off is for the borrower to refinance to a new loan in their name only. This requires the borrower having the credit history and income to qualify for a loan on their own.

When A Co-Signer Loan Makes Sense

It can be hard for someone with bad credit to get a personal loan without a co-signer, so having one often makes sense in that situation.

Using a co-signer on a loan can also be helpful if:

• You have a high debt-to-income ratio: Your debt-to-income ratio is the portion of your income that you spend on debt payments each month, and it can be a major sticking point for lenders. If your DTI is over 36%, you may want to find a co-signer with a lower ratio.
• You need a larger loan: Lenders can offer a larger loan amount to applicants with good credit. If you need a larger loan than you qualify for, consider adding a co-signer to your application.
• You have no credit history: A younger applicant may have little or no credit history. This kind of borrower could qualify with a co-signer who has more established creditworthiness.
• You’re self-employed: Self-employed applicants may have more difficulty proving they make enough to afford their monthly payments. Having a co-signer with a stable income can strengthen your application in this instance.

Does Being A Co-Signer Affect Your Credit?

Having a person with good credit co-sign the loan can help a borrower get approved, even if the borrower doesn’t meet the lender’s credit score requirements on their own. However, this comes with a lot of risks for the co-signer.

Co-signed loans and all the activity associated with them, including payment history, will also show up on the co-signer’s credit report. If you co-sign a loan and the borrower misses monthly payments, the lender will expect you to make them. If you don’t, your credit score will take a hit.

The Pros And Cons Of Personal Loans With Co-Signers

Now that you’re aware of how co-signed personal loans work, let’s break down the benefits and drawbacks of getting one.

The Pros Of Co-Signed Personal Loans

A co-signed loan can prove beneficial in these ways:

• The borrower can easily build credit. Along with having a better chance of loan approval with the help of a co-signer, a borrower will have an opportunity to build credit and increase their credit score over time after the approval takes place.
• The borrower qualifies for a lower interest rate. By applying for a loan with a co-signer, the borrower is likely to receive a lower interest rate than if they’d gone in alone.
• The borrower may get a higher loan amount. Similar to qualifying for a lower interest rate, the borrower is likely to receive a higher loan amount when a co-signer is involved.

The Cons Of Co-Signed Personal Loans

A co-signed loan also comes with some drawbacks. For example:

• Any missed payments would lower both credit scores. If the borrower misses loan payments or stops paying altogether, both parties’ credit score will suffer. This could seriously affect the financial future of the borrower and the co-signer, including their ability to qualify for new loans.
• The debt limits the borrowing power of both parties. Since lenders examine your debt-to-income ratio to approve new financing, the personal loan debt from co-signing a loan could limit a co-signer’s borrowing power until the loan is paid off. For the borrower, having a co-signed personal loan on their credit report could raise the proverbial eyebrow of potential lenders in the future.
• The borrower and co-signer risk their relationship. If the borrower can’t make the loan payments and the responsibility falls on the co-signer, the borrower and co-signer risk damaging their relationship. That’s why it’s important for both parties to communicate their financial standing, expectations and responsibilities before signing the loan documents.

What To Consider Before Co-Signing A Personal Loan

Here are some other considerations and risks to think about before co-signing a loan:

• You could be responsible for full repayment. If the borrower fails to come through in repaying their debt obligations, it’s on you as the co-signer. In fact, you’ll be required to fork over the original amount of debt in its entirety if the borrower fails to make a single payment. In addition, you’ll be responsible for paying any collection costs or late fees.
• Creditors may come to you first. It’s not outside the realm of possibility for a creditor to come to you first, rather than the borrower, about settling any outstanding debt that the borrower hasn’t paid. Even worse, perhaps, the creditor could sue you or garnish your wages just as they could with the borrower.
• States have different co-signing laws. Your state may provide more extensive protections for co-signers. For example, state law may require that lenders first attempt to collect payments from the borrower before collecting from the co-signer.
• You may not be notified of late payments. If this clarification isn’t included in the contract, ask for it to be included in writing. This way, you won’t be in the dark if the borrower falls behind on payments.
• Your DTI could go up. If the co-signed loan pushes your DTI too high, you may have trouble getting approved for a loan of your own even if the borrower has made every loan payment on time. If co-signing a loan pushes your DTI past this point or it’s a possibility, you may want to reconsider.

How To Apply For A Personal Loan With A Co-Signer

If you’re ready to apply for a personal loan with the help of a trusted co-signer, the first step is to find a lender that allows you to add a co-signer’s information to your application. Not all lenders, traditional or online, allow co-signers.

Once you’ve narrowed down your options, check with various lenders (traditional banks, credit unions, online lenders, etc.) to find the best loan terms and interest rate. That way, both parties can feel confident they’re landing the most favorable deal. Look out for origination fees and prepayment penalties, as well, when shopping around.

To get a personal loan, the borrower and the co-signer must submit their personal and financial information. During the application process, both parties can expect to provide the lender with the following documentation and info:

• Current address
• Pay stubs
• Bank account information
• Tax forms
• Social Security number
• Bank statements

Both applicants can expect a hard credit check after submitting the full application. This will slightly and temporarily lower the credit score of both borrower and co-signer.

Alternatives To Getting A Personal Loan With A Co-Signer

If a co-signed loan doesn’t seem like a good fit for you, take a look at the options discussed below.

Secured Personal Loans

Most personal loans are unsecured loans, meaning they don’t have any collateral attached to them and are approved primarily on the basis of your credit score and DTI. A secured loan requires collateral and may be easier to qualify for because it guarantees the lender will essentially get their money back one way or another. If you default on the loan – meaning you’re unable to repay it – your lender will most likely seize and keep the collateral you’ve offered up.

0% APR Credit Cards

Credit card companies sometimes offer a promotional period when a borrower signs up for a new card. During this period of time, a cardholder can make zero-interest payments on their card. The promotional period can last 6 – 21 months, but once it’s over, you’ll have to start paying interest on any late payments.

Family Loans

Instead of having a family member co-sign for you to get a loan, you could see if they’re willing to lend you the money you need. Family loans are done between family members and come with agreed-upon repayment terms, which may include an interest rate and all the usual loan details typically in a binding contract. As with co-signed loans, family loans can negatively affect a relationship if you find yourself unable to repay the loan or make payments in the time frame agreed upon.

FAQs About Co-Signer Loans

Here are some questions people often ask about personal loans with co-signers.

Do I need a co-signer for a personal loan?

You may want to consider a co-signer if you have poor credit or no credit history, but having a co-signer isn’t a requirement for a personal loan. Applicants with a credit score of at least 650 should qualify for a personal loan and secure a reasonably good interest rate.

Can I get online loans with a co-signer?

As with some traditional lenders, some online lenders won’t allow you to have a co-signer on a personal loan. As you shop around for the right lender, ask your prospects about their co-signing options.

What credit score does a co-signer need for a personal loan?

The minimum credit score for a personal loan, if you want a good interest rate, is 650. Anybody co-signing your loan should have this credit score, but not all lenders require it.

What are the chances of getting a personal loan with a co-signer?

Having a co-signer with good credit can improve your chances of qualifying for a personal loan. Your co-signer’s creditworthiness can assure the lender your debt will be repaid even if you default or miss payments. With this in mind, still strive to make all your monthly payments on time.

Final Thoughts

Getting a personal loan with a co-signer can increase your odds of being approved, and it can land you a better interest rate than if you applied alone. However, a co-signer runs the risk of having to repay the loan if the borrower defaults. Consider the risks and any protections afforded you as a co-signer before agreeing to assume this responsibility. Communication between borrower and co-signer is also key.

Rocket Loans℠ doesn’t offer co-signing options, but if you start an application today, you can see the rate and terms you’re prequalified for.