If your credit score does not qualify you for a personal loan, a cosigner may be able to assist you get approved. In general, contacting a family member or close acquaintance for a co-signer is more likely to provide results. To boost your chances of approval, try applying for a personal loan with a co-signer. Here's everything you should know about using a co-signer to get a personal loan.
Recent data from the Federal Reserve shows that personal loan balances in the U.S. reached a record high of $210 billion in the second quarter of 2023, up 16% from the previous year. This surge in personal borrowing highlights the growing importance of understanding options like cosigners for those seeking loans.
A co-signer agrees to assume responsibility for your debt if you default. In most cases, a cosigner is only required to make loan payments if you fail to do so.
This is in contrast to a co-borrower, who is also responsible for making timely payments. However, a co-borrower has an equal right to own any asset purchased with the loan.
For example, as a co-signer on a car loan, you are obligated to make payments but cannot repossess the vehicle. However, if you are a co-borrower on the car loan, you have an equal claim to the vehicle and may be listed on the title.
When Do You Require a Co-Signer?
In general, you may need a co-signer to qualify for a personal loan that you would not otherwise be able to obtain. There are two major reasons why you may be unable to obtain approval for a personal loan:
Credit: If you have a low credit score, you may not be eligible for the best rates on a personal loan—or you may not be authorized at all. Someone with good credit can give you their reputation so you can obtain the loan. Similarly, a young person with no credit history may face difficulty in getting authorized. A co-signer can assist a young person in obtaining a loan and later establishing their own credit through timely payments.
Income: Even if you have fair to good credit, you may struggle to get approved for a personal loan if the lender believes you do not have enough income to make payments.
In this situation, a cosigner with a greater salary could help you qualify for the loan.
Financial experts caution that becoming a cosigner carries significant risks. A survey by Credit Karma found that 38% of cosigners had to make at least one payment on the cosigned loan, and 28% experienced a drop in their credit score due to missed payments by the primary borrower. Potential cosigners should carefully consider these risks before agreeing to cosign a loan.
In most cases, anyone can be a cosigner on a personal loan. However, in many circumstances, locating a co-signer is an issue of trust. As a result, asking a friend or family member to co-sign is more likely to yield better results.
When looking for a co-signer, demonstrate that you are unlikely to default. Because the co-signer is on the hook, you must demonstrate that you will be accountable for the debt and are likely to repay it.
In addition to using friends or relatives, some services may match you with a co-signer. In this scenario, you agree to have someone act as your co-signer. However, this service is usually subject to a cost. The cost is determined by the loan amount, your credit standing, and other variables.
What To Look For in a Co-Signer
Your co-signer should be in a good financial situation, with low debt and a sufficient income to cover the payments. When assessing an application with a co-signer, lenders typically treat the co-signer as if they were the primary borrower. Their ability to pay and their present debt-to-income (DTI) ratio will be taken into account. It is crucial to note that the loan payment from a co-signed loan may be included in a co-signer's DTI ratio, affecting their ability to obtain loans in the future.
Finally, a co-signer should have good to excellent credit. If your co-signer doesn't have good credit, you're unlikely to get approved.
The Consumer Financial Protection Bureau (CFPB) reports that cosigned loans have a higher rate of successful repayment compared to non-cosigned loans. However, the agency also warns that cosigning can strain personal relationships if the primary borrower struggles to make payments. The CFPB advises both parties to fully understand their obligations and have open communication about the loan terms and repayment plan.
Alternatives to Co-Signers
In some situations, you may not be able to obtain a co-signer for your personal loan. Because a co-signer can be treated as if the debt is theirs (even if it isn't), convincing someone to participate as your backup may be tough. In that scenario, you may want to examine other solutions.
Personal Loan With Bad Credit
There are several personal lenders accessible, some of which specialize in lending to those with low credit scores. With bad credit, you can still acquire a personal loan, but the interest rate and costs may be substantially higher. You could also be able to get a personal loan without a credit check.
If you can't wait to repair your credit before applying for a loan, one of these loans may be able to assist you in achieving your goals. Consider formulating a plan to pay off the debt as soon as possible to save money on excessive interest charges—but only if you're positive that your new loan will not have any prepayment penalties.
Secured loan
If you can't locate a co-signer and are unable to obtain a personal loan through other means, you may be able to obtain a secured personal loan. Some personal lenders accept valuable collateral, such as a car. However, if you fail to make payments, the lender may opt to repossess your car. Securing your debt with an object of value may enable you to obtain the loan, but there are hazards if you are unable to make payments later.
A study by the Pew Charitable Trusts found that 12 million Americans use payday loans annually, often as a last resort when unable to secure traditional loans. While these loans can provide quick cash, they come with extremely high interest rates, often exceeding 400% APR. Financial advisors strongly caution against payday loans and recommend exploring all other options, including secured loans or credit counseling, before considering this costly alternative.
Ask for Assistance
In other circumstances, friends or family members may be unwilling to co-sign but may agree to lend you the money directly. If this is the case, you and your loved one should sign a promissory note and agree on an interest rate and timetable. However, keep in mind that failing to repay the debt may strain your relationship.
If you're searching for a loan to cover an emergency need or basic living expenses, you could potentially request immediate assistance. Some friends and family members may prefer to pay your bills directly and give the money as a gift rather than risk their own credit by cosigning on a personal loan.
Finally, inquire about any local groups in your region that may be able to assist you. There are agencies that can help you with energy bills, food pantries that can provide you with foods, and other programs that may be able to help you meet your needs without requiring you to take out a loan.
Can You Get a Cosigner for a Personal Loan?
There are firms that connect co-signers with people who need help obtaining authorized for a personal loan. However, you will be charged an additional fee on top of your borrowing fees, so keep this in mind while making your decision.
What If I Can't Find a Co-Signer for My Loan?
If you can't locate a cosigner for a personal loan, you may need to consider alternative choices. You can compare bad credit loans to see if you can get funding at a much higher interest rate, or you can see if any of your family or friends are ready to help you meet your financial responsibilities.
Can You Be Denied a Personal Loan if You Have a Co-Signer?
Even with a co-signer, a lender may decline your personal loan application. If they decline your loan, they must provide an explanation for why the application was denied, which can help you figure out what you need to do to get authorized the next time around.
How Do Individuals Use Personal Loans?
Investopedia commissioned a national poll of 962 U.S. individuals who had taken out a personal loan between August 14, 2023, and September 15, 2023, to learn how they used their loan proceeds and how they intend to use future loans. Debt consolidation was the most popular reason for borrowing money, followed by house improvements and other significant purchases.
If you do not qualify for a personal loan, some lenders will let you use a co-signer to get authorized. However, if you have a co-signer, they will be responsible for payments if you default.
Before looking for a co-signer, consider your alternative options and make sure you have a strategy to pay off your debt in order to keep a positive relationship with your co-signer.
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