Need a Co-Signer? Here's What You Need to Know

How to Get Approved

Couple Signing Documents With Real Estate Agent
•••

ONOKY / Eric Audras / Getty Images

It’s hard to qualify for a loan without strong credit scores and a steady income. If you’re not getting approved on your own, you might have more success with the help of a co-signer.

What Is a Co-Signer?

A co-signer is somebody who applies for a loan with you and agrees to pay off the debt if you do not make payments. The co-signer signs your loan application with you (physically or electronically) and guarantees the loan. A co-signer “stands beside” the borrower, so lenders are more confident about approving a loan: Now two people are responsible for repaying the loan. At least one of them, typically the co-signer, looks like a safe bet.

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.

Why Do You Need a Co-Signer?

A co-signer makes a loan application more attractive to lenders, so they’re more willing to approve loans with a strong co-signer. Lenders are more likely to offer favorable terms on the loan, such as a lower interest rate, more flexible repayment terms, 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 critical factors. Lenders want to see if you’ve borrowed money in the past, and whether or not you repaid loans on time. Likewise, they want to know if you are currently behind on any loans. If you’re already in trouble, they’re unreluctant to approve new debt. If you’ve successfully borrowed and repaid loans repeatedly, 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 toward all of your debt. The less, the better.

Other Factors: Your credit and income are the most important factors, but other details determine whether or not you’ll get approved. For example, some lenders might be more interested in loans for new cars as opposed to used cars, or single-family homes instead of investment properties.

If you can’t get approved on your own, a co-signer might help. Especially if your lender suggests finding a co-signer, the lender is saying you don’t meet the approval criteria on your own. As long as your co-signer has good credit and plenty of income, adding their information to your application will improve your chances.

Finding a Co-Signer

Who can you use as a co-signer? Start with friends, family, and anybody who will advocate for you. You need somebody who is interested in helping you and who knows you well enough to take a risk. Think of people who believe in you and understand how hard you’ll work to repay the loan.

The ideal co-signer is an experienced borrower with plenty of extra income to absorb your loan.

Family members might know you better than anybody, but they need to be on solid ground themselves.

It won’t do you much good to ask somebody with bad credit (or no income) to co-sign. Strong credit improves your application, and sufficient income provides a safety buffer in case your life takes an unexpected turn.

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 get it.

Don’t be surprised if nobody is willing to co-sign for you. For many people, it’s too risky. Even if a co-signer wants to help, they may not be comfortable putting their future or their family’s finances on the line.

If you manage to find a co-signer, take responsibility. They’re doing a huge favor for you, and they make something possible that you can’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.

How to Get Somebody to Co-Sign for You

Be Prepared: Co-signing for somebody is a big deal. Go into the conversation with plenty of detail to help the person make an informed decision.

Be Candid: This probably isn’t a time to be shy about your finances, although you have the right to decide how to handle your relationships. Consider sharing your income and job details, which will describe your ability to repay the loan.

Know the Details: Get an intimate understanding of how your loan works, including monthly payments, total interest costs, and other features. Is there any way to release the co-signer after a certain number of on-time payments? Discuss these details with the prospective co-signer.

Acknowledge and Discuss the Risks: Your co-signer needs to know that you’re as serious about credit as they are. Plus, informing them about their risks is the right thing to do. They might not know about potential problems, described below.

If You Can’t Find a Co-Signer

If you need a co-signer but you’re coming up short, there might be other options.

Build Credit: If you can wait to borrow money, you might see your credit scores improve after taking 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 the value of your asset. Lenders want security, whether it’s a co-signer or an asset that they can take and sell 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 (leaving you unable to get to work and earn income).

Borrow Less: It might not 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.

You may also be able to open a secured credit card without a cosigner. Secured cards typically require a deposit and often a smaller credit limit, but using such a card wisely can build up your credit history (and score) to help you qualify for a better credit card or loan in the future.

What Risks Does a Co-Signer Take?

Co-signing for somebody is a generous act. People are often surprised how much risk they take when they co-sign, so it’s important for everybody, on both ends of the deal, to understand what’s at stake.

Loan Repayment: First, a co-signer is entirely responsible for the loan. If the original borrower fails to pay, the co-signer is next in line, and the lender will undoubtedly try to collect. You might have the best intentions of repaying, but things happen. You could be injured or killed in an accident (sorry to bring this up), leaving the co-signer responsible for repayment unless your loan is forgiven at death.

Limited Borrowing Ability: Because co-signers are responsible for loans (even though they might not ever make a payment), their credit is affected. If a co-signer wants to borrow in the future, lenders will see that the co-signer 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 co-signer 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, lenders will report the missed payments to credit bureaus and the co-signer's previously strong credit will deteriorate. This can also be a problem if the borrower misses a few payments without the co-signer finding out about it. The co-signer might not ever have to pay anything, but those missed payments will affect her credit.

If you’re considering co-signing for somebody, be sure to read "Before You Co-Sign for Somebody" for more information.

Pay for a Co-Signer?

Several services and individuals offer co-signing services, where you can pay for somebody to co-sign for you. Proceed with caution when using these services. Evaluate how the risk to reward tradeoff makes sense for the co-signer: You’ll pay a modest fee, and the co-signer is responsible for repaying 100 percent of your loan. You need to understand how that makes sense for somebody.

If it sounds too good to be true, it probably is. Especially on sites like craigslist, people promise to co-sign, but they may be con artists. Beware of anybody asking for your bank account number and similar details, or those demanding up-front payment with no way to ensure that they follow through on the deal.

Article Sources

  1. Consumer Financial Protection Bureau. "What Is a Co-signer?" Accessed March 16, 2020.

  2. Consumer Financial Protection Bureau. "Why Might I Need a Co-Signer in Order to Get Vehicle Financing?" Accessed March 16, 2020.

  3. Consumer Financial Protection Bureau. "How Does My Credit Score Affect My Ability to Get a Mortgage Loan?" Accessed March 16, 2020.

  4. Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed March 16, 2020.

  5. Discover Student Loans. "2 Steps to Releasing Your Cosigner," Page 1. Accessed March 16, 2020.

  6. Wells Fargo. "Secured Loans and Lines of Credit." Accessed March 16, 2020.

  7. SoFi. "Using Collateral on a Personal Loan." Accessed March 16, 2020.

  8. First Alliance Credit Union. "The Basics for Needing a Cosigner on a Loan." Accessed March 16, 2020.

  9. Federal Trade Commission. "Co-Signing a Loan." Accessed March 16, 2020.

  10. Federal Trade Commission. "Understanding Your Credit." Accessed March 16, 2020.

  11. Consumer Financial Protection Bureau. "I Was Asked to Co-Sign Financing for a Car. What Am I Being Asked to Do and What Does This Mean for Me?" Accessed March 16, 2020.