A recent report by the non-profit Corporation for Enterprise Development (CFED) indicates that 56% of U.S. consumers have poor or subprime credit scores (generally defined as a credit score between 300 and 620 on an 850 scale). Individuals with a poor or subprime score often find it difficult to qualify for a loan, and if they do, the interest rate is typically much higher than it is for consumers with good credit.
One solution is to have a cosigner with good or excellent credit help you obtain more favorable terms. When a loan application has a cosigner, that other individual, the cosigner, provides a layer of insurance for the lender, by promising payment should you default.
Loans that allow a cosigner
Most types of loans allow a cosigner, and cosigning is common with both auto loans and student loans. Some banks and credit unions will also allow a cosigner on a personal loan, a type of loan that is typically unsecured and based on the borrower’s ability to pay, with the funds commonly used to pay for an immediate need, such as a wedding or home renovation.
When is a cosigner a good idea?
There are several instances where you’ll want to consider looking for a cosigner. The first is where you have bad credit or no credit at all. If you have a poor or subprime credit score or you don’t yet have a credit score because you’ve never applied for credit, a cosigner is useful. Another instance is when you’ve already been denied a personal loan. Finally, you should consider a cosigner if a lender offers you a loan with unattractive terms, such as a very high interest rate.
Can a lender require a cosigner?
Yes and no. A lender cannot require that you have a cosigner on a personal loan if your income and credit score qualify you for the loan on your own. However, if you don’t qualify, the lender can ask that you find a cosigner. In nearly all cases, your interest rate will be more favorable with a cosigner who has good credit and a stable income.
Who can be a cosigner on a loan?
A cosigner can be almost anyone, including a parent, guardian, spouse, other relative, or even a close friend. Your loan cosigner should have good to excellent credit, a steady income, and should understand the risks associated with serving as your cosigner. Namely, anyone who cosigns your personal loan is agreeing to make payments should you fail to do so.
The difference between a cosigner and co-borrower
A cosigner is responsible for paying back the loan if you default and typically doesn’t benefit from the loan’s proceeds. A co-borrower, on the other hand, is jointly responsible for making loan payments.
The benefits of having a cosigner on your personal loan
You’ll get access to credit and borrowing terms that otherwise wouldn’t be available to you as a lone applicant, including a lower interest rate.
- A co-signed loan can help you establish a positive credit history and improve your credit score.
- Paying off a cosigned loan can help you develop positive money management skills.
Steps to getting a cosigned loan
Getting a cosigned loan is a two-step process. First, you need to find a lender who offers cosigned personal loans (see below). Second, you need to find someone to cosign on your behalf.
The first place you should look is to relatives who are invested in your success and your financial independence. Let them know that you understand the burden and the risk, and take paying back the loan seriously. When you have a cosigner in your corner, it’s time to consider lenders and the terms they offer.
Who provides cosigned personal loans?
Few major banks offer personal loans these days, though Citibank and Wells Fargo still do and both allow cosigners. Credit unions are often an excellent source of credit because they work with consumers to qualify and secure lower interest rates. You also have the option of going with an online lender like the four listed below:
Lightstream is a lender that advertises loans to consumers with excellent credit. However, they allow joint applications and only one applicant needs to meet those requirements for a personal loan approval. Lightstream’s APRs range from 1.74%-14.99%, with loan terms from 2-7 years on loan amounts of $5,000-$100,000. There are no fees, and funding is same day.
LendingClub is a popular online lender that is testing the use of cosigners. They state that their debt-to-income ratio requirement on joint applications is 30%. LendingClub’s APRs are 5.99%-35.96% on 3-5 year loans from $1,000-$40,000. Loans have origination fees and funding can take up to seven days.
FreedomPlus indicates that as many as 40% of their borrowers have cosigners, and their APRs range from 7.93%-29.90%, which includes a loan origination fee. They offer 2-5 year loans of between $5,000 and $35,000, and funding can take place in 48 hours.
OneMain Financial is an online lender that offers loans to consumers with poor credit. They also allow joint applications, however, which will get you a lower interest rate. Loans are from $300-$15,000 with APRs ranging from 10%-30% and terms from 3-5 years. The company also charges origination fees.
A comparison of a single-signed loan vs. a cosigned loan
Let’s assume that you’re not sure about the benefits of using a co-signer on a personal loan. Since your co-signer will have a better credit score and your combined debt-to-income ratios will be more favorable, lenders will offer a lower interest rate. How much lower? It depends on the lender as well as you and your co-signer’s combined credit application.
For example, let’s say that you wish to borrow $10,000 for 3 years, your credit score is 610, and your annual income is $35,000.
Your co-signer has a credit score of 775, an annual income of $75,000, and low overall debt.
Using a lender such as LendingClub, you apply both with and without a co-signer.
Without a cosigner: APR 32% Monthly Payment $435.54 Total Cost $15,679.44
With a cosigner: APR 7% Monthly Payment $308.77 Total Cost $11,115.72
With a cosigner, you would save $126.77 on monthly payments and $4,563.72 over the life of the loan.
As you can see from the above example, getting the best terms possible is essential. Often, a cosigner can help you both access credit and do so at the most favorable rates. Learn more about these online personal loan lenders and read reviews from recent customers before you apply.