How to Find a Cosigner
Why you Need One, Who to Ask
Getting approved for a loan can be difficult if you do not have strong credit scores and a steady income. If you’re not getting approved for a loan on your own, you might qualify with the help of a cosigner.
What is a Cosigner?
A cosigner is somebody who applies for a loan with you and agrees to pay off the debt if you do not make payments. The cosigner actually signs your loan application and guarantees the loan for you and your lender.
For example, a relative might help you get approved for an auto loan by promising to make the payments if you fail to do so. The cosigner “stands beside” the borrower so lenders are more confident about approving a loan: now there are two people responsible for repaying the loan – and at least one of them (usually the cosigner) looks like a safe bet.
Why do you Need a Cosigner?
A cosigner makes a loan application more attractive to lenders. As a result, lenders are more likely to approve the loan, and they’re likely to offer better terms on the loan (such as a lower interest rate, more flexible repayment, and lower fees).
When you apply for a loan, lenders try to figure out whether or not they’ll get their money back. They primarily look at your credit and income to make a decision.
Credit scores: your history of borrowing is one of the most important factors. Lenders want to see if you’ve borrowed money in the past, and whether or not you repaid your loans on time.
Likewise, they want to see if you are currently behind on any loans (if you’re already in trouble, they won’t approve new debt). If you’ve successfully borrowed and repaid many times in the past, you’ll have good credit – and you’re more likely to get approved.
Income: lenders also need to see that you have sufficient income available to repay your loans – including the new loan you’re applying for.
To do this, they calculate a debt to income ratio, which looks at how much of your monthly income goes towards all of your debt. The less the better.
Other factors: your credit and income are the most important items, but other characteristics determine whether or not you’ll get approved. For example, some lenders might be more interested in new cars as opposed to used cars, or single-family homes as opposed to investment properties.
If you can’t get approved on your own, a cosigner might help. Especially if your lender suggests finding a cosigner, the lender is saying you don’t meet the criteria on your own.
The cosigner’s credit and income get added to your application. Assuming your cosigner has good credit and plenty of income, this will strengthen your application.
Finding a Cosigner
Who can you use as a cosigner? Start with the three F’s: Friends, Family, and Fools. You’ll need somebody who is interested in helping you and who knows you. Think of people who believe in you and understand how hard you’ll work to repay the loan.
That’s why it’s a good idea to start with family – they know you better than anybody – and with people who are truly on solid financial ground. Your parents may want to help you start building credit, your friends may want to give you a hand, or another supporter may believe you can pay off the loan if you can just get it.
The ideal cosigner is an experienced borrower with plenty of extra income to absorb your loan. It won’t do you much good to ask somebody with bad credit or no income to cosign. Good credit improves your application, and sufficient income provides a safety buffer in case your life takes an unexpected turn.
Don’t be surprised if nobody is willing to cosign for you. For many people, it’s just too risky. Even if a cosigner wants to help, they may not be comfortable putting their future or their family on the line.
If you manage to find a cosigner, take responsibility. They have done you a huge favor and made something possible that you couldn’t do on your own. Do whatever it takes to get that loan paid off – make sacrifices, work extra, and track every penny you spend until the loan is paid off.
If you Can’t Find a Cosigner
If you need a cosigner but you’re coming up short, there might be other options.
Build credit: if you can wait to make your purchase, you might see your credit scores improve if you take steps to build credit. Get small loans, pay them off, and repeat. You can even improve your chances of getting approved with strategies like cash secured loans.
Pledge collateral: if you own something of value, you might be able to borrow against that value. Lenders want security – whether it’s a cosigner or another asset that can be taken to recover their money. Of course, this is risky because you might lose the asset and end up in a worse situation (for example, you might lose your home in foreclosure or have a vehicle repossessed).
Borrow less: this won’t be your first choice, but is there a way to fund your needs with less money? You might get approved for a smaller loan (because a smaller loan means smaller payments – which your income might be able to support).
What Risks does a Cosigner Take?
Cosigning for somebody is a generous act. People are often surprised how much risk they take when they cosign, so it’s important for everybody – on both ends of the deal – to understand what’s at stake.
Loan repayment: first, a cosigner is fully responsible for the loan. If the original borrower fails to pay, the cosigner is next in line (and the lender will certainly come knocking).
Limited borrowing ability: because cosigners are responsible for loans (even though they might not ever make a payment), their credit is affected. If a cosigner wants to borrow in the future, lenders will see that the cosigner could potentially have to pay off an extra loan, and that might be the difference between an approval and a rejection.
Damaged credit: if a cosigner is unable or unwilling to repay the loan, their credit will suffer. It’s as if they applied for the loan themselves – if it doesn’t get repaid, the missed payments will be reported to credit bureaus and the cosigner's previously strong credit will weaken. This can also be a problem if the borrower misses a few payments without the cosigner finding out about it: the cosigner might not have to pay anything, but those missed payments will affect her credit.
If you’re considering co-signing, be sure to read Before You Co-Sign a Loan for more information.