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Getting a personal loan with a cosigner can help unlock more attractive rates and terms by allowing another person to share responsibility for the debt.
Before you apply for a personal loan with a cosigner, you should look at the cosigner’s credit history and make sure they’re committed to repaying the loan if you default.
When someone cosigns a loan, they agree to take full responsibility of the debt if you can’t make payments for any reason. But while a cosigner is liable for the loan, they typically don’t make regular payments or have access to the funds.
Lenders may be more likely to approve your application if your cosigner has a robust credit score and a dependable source of income. Adding a creditworthy cosigner could also help lower interest rates. However, missing payments can hurt both you and your cosigner’s credit score.
When to use a cosigner
It makes sense to have a creditworthy cosigner on your personal loan if any (or all) of the following apply to you:
- A low credit score
- Little to no credit history
- Low or unpredictable income
- Short employment history
- High debt-to-income ratio
Low credit score or no credit history: If your credit score is low — or you have no credit history at all — you’re likely to face an automatic rejection for most personal loans. Even with online lenders, which have more lax requirements than banks, you typically need a FICO Score of 600 or higher. If you’ve never had a credit card or applied for a loan, chances are you won’t have enough history to produce a score.
Low income or short employment history: Your income and employment history could prevent you from getting approved for a personal loan. This is particularly true for recent college graduates or anyone with unpredictable income — such as freelancers, contractors or commission-based workers. Lenders want to see borrowers with a reliable source of income high enough to support the loan’s payments. Because of this, many lenders have strict income cutoffs.
High debt-to-income ratio: Even if you are applying for a debt consolidation loan, lenders want to see borrowers with debt-to-income (DTI) ratios below 40%. Like the income requirement, this shows the lender you can handle your current debts. If your DTI ratio is high, it can raise a red flag, thus reducing your eligibility for a personal loan.
To calculate your DTI ratio, divide your monthly debt and housing payments by your pre-tax income. For example, if your pre-tax monthly income is $6,000 and your mortgage, car loan and student loan payments total $2,300 a month, your debt-to-income ratio would be 38% ($2,300 ÷ $6,000).
Low credit, unreliable income or a high DTI ratio could prevent you from receiving approval for a personal loan. If your application does go through, it’ll likely come with a high interest rate and unfavorable loan terms. In this case, adding a cosigner with good credit can improve your chances of getting a low-interest personal loan. Additionally, you can look into bad credit loans with a cosigner — just be watchful for super high rates since shady lenders prey on those with bad credit.
Where to get personal loans with a cosigner
Most banks and credit unions allow you to have a cosigner on a personal loan. In many cases, you and the cosigner will need to be a member of that bank (if not, you might still be eligible for a loan but for a lesser amount). It’s harder to find an online lender that allows cosigning on personal loans, although certain lenders allow for a co-borrower.
What to look for in a cosigner
Because lenders consider your cosigner’s creditworthiness and information when making a loan decision, you’ll want to ensure your cosigner meets the following criteria:
- U.S. citizen or permanent resident
- A good credit score (670 to 700 or higher)
- An excellent credit history
- Stable income with a good employment history
- A low debt-to-income ratio
It’s important to know your cosigner personally since they’ll put their credit on the line for you. People commonly cosign loans for their family members, particularly children, spouses and parents.
The term cosigner is often confused with co-borrower. Although both share some similarities, each has distinct differences:
- Cosigner: When someone cosigns your loan application, they act as a safety net in case you can’t repay the debt. However, they typically don’t make regular payments and can’t access the online account, statements or the loan proceeds.
- Co-borrower: A co-borrower assumes joint ownership of the account, including regular access to the account and funds. Typically, the co-borrower makes equal payments on the loan.
Alternatives to cosigned personal loans
If getting a cosigner is not an option, you can explore the following options.
Get a secured personal loan
Many banks and credit unions allow their members to take out a personal loan secured by their savings, assets, money market or CD account. Usually, the loan amount cannot exceed the value of the deposit account. While securing a loan isn’t risk-free, qualifying for a secured loan is generally easier than a traditional loan. Additionally, secured loans tend to offer low-interest rates.
Apply for an online loan
While most banks and credit unions want borrowers with a solid credit history and a dependable source of income, many online lenders operate under different requirements.
Some lenders have credit score requirements as low as 500, whereas others will accept a full-time job offer instead of a current job (which is good news for recent graduates). Most online lenders have a speedy application process and even allow you to check rates without affecting your credit score. Ultimately, it’s worth shopping around to find the best deal.
Build your credit
If you’re experiencing financial hardship and need a loan immediately, it’s worth pursuing loans with a cosigner or a secured personal loan. However, if you can make your current budget work, it’s best to postpone applying for financing until your credit is in good shape.
Here are some critical steps to take in rebuilding your credit:
- Become an authorized user on a credit card. If a family member or close friend is willing to add you to their credit card, it can go a long way to boost your score.
- Apply for a secured credit card. You must put down a refundable deposit as collateral to receive a secured credit card. Your credit limit should increase over time if you make timely payments.
- Make on-time payments. Make sure to keep up with current debts to avoid any late fees. If your debt is unmanageable, reach out to your provider to discuss a payment plan.
- Keep credit utilization low. You can calculate your credit utilization by dividing your current debts by your total available credit. The credit bureaus recommend keeping your credit utilization below 30%.
- Avoid derogatory marks. Things like bankruptcies, foreclosures, defaulted loans and tax liens can cause your credit score to tank. Take steps to pay off debts and seek help from pre-bankruptcy counseling (fees for this service can be waived).