Getting A Personal Loans With Cosigner – What You Should Know?
Reviewed by Kristina Knight, Journalist , BA
The article is checked by our editorial team, Which includes entrepreneurs who are painfully aware of how overwhelming and challenging it is to start a business for the first time.
Qualifying for a personal loan when you have no credit or bad credit may mean that you are stuck with less-than-ideal repayment terms, or you may not be able to qualify for the personal loan altogether.
Luckily, there is a solution that you can employ that can help you resolve these issues, and help you get the funding you need.
Continue reading below as we discuss what borrowing with a cosigner looks like, and what all is necessary to get this completed.
What Is A Cosigner?
Let’s first discuss what a cosigner is before we discuss why you’d want one to get a personal loan.
A cosigner is an individual of your choosing who agrees to the financial responsibility of your debt alongside you. This means they will make the payments on the personal loan if you are unable to do so yourself.
The credit history of a cosigner may be impacted if the primary borrower stops making payments or defaults on the loan altogether.
When you’re choosing a cosigner to take out a personal loan, there are some things you’ll want to consider beforehand. So, this means it’s not wise to choose just anyone to be your cosigner.
You may want to consider the person’s credit history, as you probably won’t want to choose someone with bad credit. This wouldn’t likely help your case or make you more likely to qualify for the personal loan. Plus, the higher someone’s credit score is, the lower your interest rate is likely to be.
Another thing to consider when choosing a cosigner for a personal loan is their income. Many lenders will consider your income levels before qualifying you for the lona, so you want to find someone who will meet or exceed these limits.
Lastly, your cosigner will need to have a good debt-to-income ratio. This means that your cosigner doesn’t carry a lot of debt in relation to their income. With this in mind, just because someone has a high income level, lenders may not like their application if they hold a high level of debt in comparison.
For instance, say someone makes $8,000 a month, but they have $5,000 a month in mortgage payments, auto loan payments, and student loan payments, this is generally a high debt-to-income ratio that many lenders will turn away.
How Does A Loan Work With A Cosigner?
When you have someone who has agreed to be your cosigner and you want to take out a loan, the lender will consider both of your credit histories in addition to other application factors as we discussed above.
Taking out a personal loan with a cosigner can help you get better terms like lower interest rates. However, the cosigner will be on the hook for your payments, and any late payments or defaulting on the loan will be reflected on their credit report, as well as your own.
Applying for a personal loan with a cosigner works because it makes your application more creditworthy and trustworthy to the lender when you’ve chosen your cosigner correctly. Especially if you’re someone who has had bad credit, or maybe no credit history at all, the bank likely won’t approve you on your own, because they don’t have any reason to believe that you will pay them back.
It’s important to note that getting a cosigner is a different thing than getting a co-borrower. In this case, the loan proceeds only go to the primary borrower, not the cosigner, though both will be responsible for ensuring the monthly payments are made.
What Are The Risks Of Using A Cosigner?
Getting a cosigner to take out personal loans sounds like a good idea, and it’s often very helpful for those who don’t have excellent credit and want to qualify for better loan terms. However, this doesn’t mean that it comes without risks, both personally and financially.
On the financial side of things, the cosigner is taking on the responsibility of the loan, so their credit can be dinged if the borrower doesn’t make the monthly payments, or defaults on the loan.
Because of this, getting loans with a co-signer can put stress on your personal relationship with the person, especially if their credit score is impacted by your inability to make payments on your personal loan.
Compare Personal Loans With A Cosigner
Not every lender will offer personal loans with a co-signer, and approval odds may vary between lenders. So, this means you’ll want to compare personal loans with a co-signer between a number of lenders in order to find the right match for you and your unique situation.
For one, you can consider if the lender has a prepayment penalty. Depending on what you’ll need the personal loan for, you or your co-signer may want to know if this is a stipulation before signing the dotted line and facing prepayment penalties down the road.
You should also consider the loan offer that a lender presents to you, including the repayment terms, interest rate, minimum credit score requirements, if they charge an origination fee, and what the monthly payment will be, among other details. This can help you compare personal loans from other lenders in a subjective way.
Most lenders will offer personal loans with a co-signer who has an excellent credit score, though this isn’t always a guarantee. So, make sure you inquire about their co-signer policy before you go through with the application process. There is no right answer for where you can find the best personal loans, as each lender has its own factors that make them more appealing than others.
Something else to consider when you’re taking out a personal loan with a co-signer is if the lender will allow the co-signer to be removed from the loan at any point. This means they can help strengthen your application and up your approval odds, though they can be removed of their financial responsibility before the loan is fully repaid.
How To Apply For A Personal Loan With A Cosigner?
When you’ve discovered where you can get the best personal loans given your circumstances, the following steps are what you can expect before you can get approved and receive the loan funds.
Remember, each lender will have their own process and qualification requirements, so utilize this as a guide for how the process could look.
Find a Cosigner
The first thing you’ll need to do is find someone to be your cosigner. This may be a parent, a sibling, a significant other, or a close friend. Remember what we discussed about putting strain on your personal relationships, so consider having a very transparent conversation with the person about what the expectations are and how you’ll communicate with each other about the loan balance, how you’ll consider personal loan offers, and more.
Browse Financial Institutions
Once you know who your cosigner will be, you can start browsing through different personal loan offers from a bank, credit union, and other financial institutions. See if these personal loan providers are offering special discounts or offers if you apply by a certain date, if they’ll waive or charge origination fees, application fees, and other details. Above all, ensure that they will accept a cosigner for personal loans.
At this time, see what each lender’s requirements are, and ensure that your cosigner meets these criteria.
Gather Documents
Once you’ve settled on a lender that best matches your needs, you and your cosigner need to gather up the required information and documentation that the lender requests. This can include your proof of income, employment history, and government ID. Make sure you both have this on hand before you start the application process.
Fill out the Application
With all the preparation work out of the way, you can begin to fill out the loan application alongside your cosigner. You may be asked for the loan amount you’re requesting, what you’ll use the funds for, and desired repayment terms. Be prepared to answer questions like your credit score, income level, and other outstanding debt payments you have.
Wait for Decision
After you submit your application, you’ll need to wait for the lender to review your information and make a lending decision.
Sign Loan Agreement & Receive Funds
Once you’re happy with the loan terms that the lender is offering, you and your cosigner will need to sign the agreement to officially accept the loan. This agreement will lay out the repayment schedule, the interest rate, origination fees you’ll pay and other details about the loan. After this is completed, you will receive the funds from the lender.
Conclusion
Personal loan lenders often allow for co-signers with an excellent or good credit score, which can help people who don’t have the best credit score secure better loan terms and a lower interest rate on the debt. There are many factors to consider when choosing a cosigner for personal loans, including their credit scores, how it may impact your personal relationships, and other aspects.
No matter what you need a personal loan for–like debt consolidation–or why you need a cosigner–like if you have a low credit score–getting a cosigner could be the perfect solution for you.
Remember, getting a co-signer is not the same thing as having a co-borrower, so you can choose practically anyone to be your co-signer as long as they meet the minimum credit score requirement and other qualifying criteria.
Frequently Asked Questions (FAQs)
Secured loans are backed by collateral of some sort, like an auto loan with the purchased vehicle, or a mortgage with the real estate it’s used to purchase. In the case the borrower defaults on the loan, the lender can repossess the collateralized asset in order to recoup the loan amount. On the other hand, an unsecured loan, like a personal loan, is not backed by any collateral, so lenders may have stricter qualifications on the loan application.
No, co-borrowers are not the same as cosigners, as a cosigner does not receive the loan amounts, while a co-borrower does. Similarly, a co-applicant is something different from a co-borrower or co-signer, as their financial stats may be considered for the loan, like their income level, though they may not necessarily be responsible for the loan or the origination fee, or receive any of the funds. So, understand that getting a loan with a co-borrower is different than with a cosigner.
In some cases, yes, it’s not just for people with poor credit. You can benefit from your co-signer’s credit when applying for a loan, but you can also benefit from having co-signers if you don’t meet the income requirements or other application requirements.
There are many reasons why someone would need to secure a personal loan, including to consolidate debt like credit card debt from multiple cards, to pay for a vacation, to pay off medical bills, and a number of other potential reasons.
This will vary among lenders. However, few lenders will accept applicants with credit scores below 670, or fair credit.
Most banks, credit unions, or an online lender will offer personal loans with varying loan amounts available. You may want to consider somewhere you already have a bank account to get the best offer or interest rates.
You will incur these penalties if you pay off the loan early, before the date that was laid out in the loan agreement.
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