Looking to sidestep high interest rates and expensive fees on your personal loan? Unless your credit score is above 720 and you have a lengthy credit history, you won’t qualify for the best rates and terms. But there’s another way to secure competitive rates. Applying for personal loans with a cosigner can help you qualify for larger loan amounts with better rates and terms.
If you have a friend or relative with excellent credit who is willing to cosign your joint personal loan, you can qualify for prime rates and terms. The only problem? Most lenders don’t accept cosigners.
What is a cosigner?
A cosigner is a trusted peer, usually a close friend or family member, who promises to pay for a loan if the main borrower doesn’t. Cosigners are beneficial for both the lender and the borrower. Lenders love cosigners because they reduce the risk of a loan default. Borrowers benefit because they qualify for lower interest rates and more affordable fees.
What is the difference between a cosigner and a co-borrower?
Both cosigners and co-borrowers share responsibility for paying the loan. However, co-borrowers (also known as joint applicants) also receive a share of the money from the loan, and usually share the responsibility of paying the loan from the start.
Cosigners, on the other hand, do not receive any money from the loan and ideally won’t have to make any payments. Only if the primary borrower defaults on their loan will the cosigner have to cover their payments.
The difference between a cosigner and a co-borrower is particularly important with secured loans, such as mortgages and auto loans. In such cases, a co-borrower appears on the property’s title and shares ownership of the security, while a cosigner does not.
Online lenders that offer personal loans with a cosigner
Although commonplace with mortgages, auto loans, and student loans, only a few online lenders will consider unsecured personal loans with a cosigner.
Of course, only cosigners with excellent credit and a long credit history will allow you to qualify for the lowest rates. Even if your cosigner has great credit, you may not qualify for the best rates if your credit history and debt-to-income ratio are considered high-risk.
Considerations before cosigning a joint loan
Personal loans with a co-applicant are good for the borrower, but not always for the cosigner. Whether you’re the borrower or the cosigner, cosigning a loan is not something you should take lightly. You have more to lose than money and your credit score. Sometimes, close friendships and family ties become collateral damage when a cosigned loan goes bad. Before cosigning a loan (or recruiting a cosigner), consider the following:
Cosigning a loan is risky business
According to a 2016 report, 38% of cosigners had to repay the loans they guaranteed. Those are scary odds. No matter how much you trust the borrower, unforeseen circumstances can get in the way of timely payments. You should only cosign loans you could afford to pay if the borrower stopped making their payments. After all, there’s a good chance you’ll have to do so.
Negotiate the terms
As cosigner, you can negotiate the terms of your liability with the creditor. The Federal Trade Commission recommends cosigners include a clause that limits liability to the principal of the loan. Consider a clause like: “The cosigner will be responsible only for the principal balance on this loan at the time of default.” It could save you from paying interest for a long time.
Cosigning a loan will affect your credit score
Lenders consider loans you cosign as debt. This will increase your debt-to-income ratio, which determines 30% of your credit score (Source). Be sure not to cosign any figures which will drastically throw off your ratio.
Source – FICO
Request monthly statements
Cosigners have the right to receive monthly statements for the loans they guarantee. If you cosign a loan, ask the lender to send you monthly statements. The statements will alert you to any missed payments that could further damage your credit score.
How to get personal loans without a cosigner
Even without a cosigner, there are ways for borrowers with poor credit to get a loan. The rates will be higher, but on the bright side, paying off a new loan on time can improve your credit going forward.
Of course, there are cheaper ways to improve your credit than getting a personal loan. If you don’t need money straight away, consider getting a credit building account with SelfLender. For a small fee, SelfLender will report monthly deposits in your account as loan payments to all three credit bureaus (Equifax, Experian, and TransUnion). Over time, if you don’t miss any deposits, this will improve your credit score.
If you need the money now, there are several online lenders that offer joint personal loans to people with bad credit and limited credit histories. SuperMoney’s personal loans database allows you to filter lenders based on the features that matter to you.
Here are our top lenders for people with bad credit.
Want more information on personal loans? Compare recommended lenders with competitive rates with SuperMoney.