Looking to sidestep high interest rates and expensive fees on your personal loan? Unless your credit score is above 720 and you have a prolific credit history, you won’t qualify for the best rates and terms. But there’s another way to secure competitive rates. If you apply for a personal loan with a cosigner, you can qualify for larger loan amounts with better rates and terms.
If you have a friend or relative with excellent credit who will cosign your personal loan, you can qualify for prime rates and terms. The only problem? Many lenders don’t accept cosigners.
So what is a cosigner, anyway? How should you choose the right cosigner? And how will having a cosigner benefit you? Read on to learn the basics about getting a personal loan with a cosigner.
What is a cosigner?
Lenders that allow 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. And borrowers benefit because they qualify for lower interest rates and fees.
When should you use a cosigner?
If you have bad credit (or no established credit at all), having a cosigner raises your odds of getting a loan with competitive rates and terms.
Likewise, if your loan application was just denied, bringing a cosigner on board gives you a shot at getting approved.
Finally, if you’re offered a loan with unattractive rates, re-applying with a cosigner might yield a better deal.
However, your first step should always be to see what kinds of offers you can prequalify for when applying alone. This process doesn’t hurt your credit score, and will be a useful reference point if you decide to re-apply with a cosigner. Ready to see what you might qualify for? Pre-qualify for personal loans in seconds here.
Who should be your cosigner?
A cosigner can be almost anyone you trust, including a parent, guardian, spouse, other relative, or even a close friend. Your loan cosigner should have good to excellent credit and a steady income source.
Of course, only cosigners with excellent credit and a long credit history will qualify you for the lowest rates. But even the most reputable cosigner won’t entirely negate your own credit situation. 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.
And remember — if you fail to make your payments, the responsibility will fall to your cosigner. This can seriously strain your relationship. You should choose a cosigner who understands this risk, and who trusts you enough to put their own finances on the line.
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 loan money, 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.
This distinction is particularly clear with secured loans, such as mortgages and auto loans. In these cases, a co-borrower appears on the property’s title and shares ownership of the security, while a cosigner does not.
Online lenders that accept cosigners
Although cosigners are common with mortgages, auto loans, and student loans, only a few online lenders allow for cosigners on unsecured personal loans.
Looking to apply to an online lender with a cosigner? Consider the following options:
Lightstream generally advertises loans to consumers with excellent credit. However, they do allow joint applications, and only one applicant needs to meet their requirements to secure a personal loan approval. There are no fees, and funding can be as fast as the same day.
LendingClub is a popular online lender that allows use of cosigners. They state that their debt-to-income ratio requirement on joint applications is 30%. Loans have origination fees and funding can take up to seven days.
Upgrade’s minimum credit score is low compared to similar lenders, and it comes highly recommended by borrowers. But don’t forget to factor in the origination fee when comparing its total cost with other options.
FreedomPlus indicates that as many as 40% of their borrowers have cosigners. 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. Note that OneMain charges origination fees.
Should you cosign a personal loan?
Only if you really trust the cosigner. Personal loans with a co-applicant are good for the borrower, but not always for the cosigner. And if the worst happens and your co-applicant defaults on the loan, you’ll be responsible for making paying it off in full.
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 a personal loan without a cosigner
Even without a cosigner, there are ways for borrowers with bad 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.
However, different personal loans come with different rates, fees and requirements, so check out what the best personal loans are to ensure that you choose the best option for you.
Here are our top lenders for borrowers with bad credit:
Ready to get started? Your first step is to find out what kinds of rates and terms you can qualify for without a cosigner. Compare recommended lenders with competitive rates with SuperMoney, or find out what you pre-qualify for just by answering a few questions. And if you can’t qualify for the personal loan of your dreams alone, talk to your financially stable friends and family about cosigning.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.