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

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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 one (if available) could help.

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 co-sign, inform them of the risks and make sure they understand their rights as a co-signer.

What is a co-signer?

A co-signer is someone who applies for a loan with another person and legally agrees to pay off the debt if the primary borrower isn’t able to make the payments. A co-signer could be a trusted friend, a family member or anyone close to you who has a strong credit score and a consistent income.

Co-signers are common in cases when the borrower is struggling to get approved for a loan based on their credit score, income or existing debt. Lenders perceive applicants with poor financial history as high risk — there’s a chance they won’t be able to repay the loan, which means that the lending company will lose money. A co-signer with good credit improves the primary borrower’s overall creditworthiness, meaning lenders are more likely to approve the loan or offer better rates.

Does getting a co-signer affect 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, and this will 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.

What should you 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 who has 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. For example, if your monthly debt is $1,000 and your gross monthly income is $2,000, then your DTI ratio is 50 percent.

Where can you get a personal loan with a co-signer?

When searching for a lender that offers personal loans with a cosigner, you may have trouble finding one. The lenders we reached out to allow you to apply with a co-borrower — someone who is equally responsible for repaying a loan — and not a co-signer.

That said, we found two lenders that allow you to take out a personal loan with a co-signer.

Lender APR
Mariner  18.99 to 35.99%
Laurel Road 7.00% to 24.75%

 

In addition, some lenders only allow you to apply for a personal loan with a co-signer if you’ve been a member with them for a certain time period. You may, for example, have better luck with a bank you’ve been with for years than with a company that only offers loan services.

When does using a co-signer make 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 more risky 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 really 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.

“Co-signing or co-borrowing 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.”

Alternatives to co-signing

If you can’t find a willing co-signer or you want to avoid the risks associated with co-signing, 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 cosigner. 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, Transuion 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, 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. A major downside of these loans, however, is that you could receive an interest rate greater than 30 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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Written by
Dan Miller
Points and Miles Expert Contributor
Dan Miller is a contributing writer for Bankrate. Dan writes about loans, home equity and debt management.
Edited by
Loans Editor