When you apply for a personal loan, lenders review your credit history and other financial details, then decide whether to approve your application. If you have an excellent credit score and a high income, the decision is often easy. But when your application needs a boost to meet lender requirements, applying for a personal loan with a co-signer may improve your chances.
Getting Personal Loans With a Co-Signer
Get approved with less-than-perfect credit or limited income
Obtain better loan terms with a creditworthy co-signer
Improve your credit history as you repay the loan
Involving money in a relationship can make things awkward
Your credit and your co-signer’s credit will suffer if you miss payments
You may reduce your co-signer’s ability to borrow for other needs
Why You Might Need a Co-Signer
Lenders need to be confident that you’ll repay your personal loan. If you have a low credit score or income, lenders may be reluctant to approve your application. But if somebody else guarantees your loan (promising to repay the debt if you stop paying), the deal becomes more attractive.
That’s not to say a lender won’t lend to you if you have a bad credit score. The options just might be more limited. Research personal loan lenders for those with bad credit and consider whether you might qualify or not based on your credit score. If you’re not sure whether you’ll be approved for the personal loan, consider working with a co-signer. Be careful of checking to see if you’ll be preapproved or not, as some lenders may do a hard pull on your credit, which could hurt your score even more.
What Does It Mean to Co-Sign?
When you use a co-signer, that person applies for the personal loan with you, and they agree to pay off your debt if you don’t. You and the co-signer are both responsible for the debt. The personal loan typically appears on your credit report as well as the co-signer’s credit report, and both of your credit scores will suffer if you miss payments or default on the loan. A co-signer does not receive the money you borrow, but they’re ultimately responsible for repayment.
Who Should You Ask?
To improve your loan application, it’s wise to have a co-signer with better credit than you and enough income to potentially cover your loan payments. Because co-signing is a generous act (they may have to repay your loan), borrowers often ask close friends or relatives to be co-signers. However, introducing money into a relationship can make things awkward, so you may have to make difficult decisions as you search for the right person.
An ideal co-signer has a high credit score, and plenty of income to cover their existing expenses as well as the new loan you’re applying for.
As you weigh your lending options, it can be helpful to estimate your loan payments through a loan calculator. A tool like this gives you a sense of how repayment terms, interest rates, and credit scores can affect your monthly payment:
How To Apply
When you are ready to apply for your personal loan, you’ll need to fill out the application with your info and your co-signer’s info. Information you may need includes Social Security numbers, income amounts, and debt obligations. Personal loans are available from a variety of lenders, including your bank or credit union, and you can use the funds to consolidate debt, pay for home renovations, and more. You can fill out the application online or in person at a branch. The amount of time it takes to get the loan funds depends on the lender.
Borrowing a Personal Loan Without a Co-Signer
Ultimately, the goal is to borrow a personal loan on your own, without relying on a co-signer. Over time, you can improve your credit so lenders are more eager to work with you and offer attractive terms.
Check Your Credit
You may qualify for a personal loan with fair or poor credit, but you may not get the best interest rate. Before applying, scrutinize your credit reports to understand what they contain and find any errors. Mistakes that add negative information to your files can drag your score down, so fix those errors several months before you apply for a personal loan.
Build Your Credit
Low credit scores can be a result of problems in your credit history, errors in your credit reports, or a lack of borrowing. To improve your credit, borrow money when it makes sense to do so. Use lenders that report your activity to credit bureaus, and always pay on time.
Secured credit cards and cash-secured loans might be easy to qualify for when you have less-than-perfect credit, and they can help improve your scores.
Pay Down Debt
You might have more success if you pay down your debt before applying for a new personal loan. Doing so can help in two ways.
- When you pay down credit cards, it signals that you’re financially stable. Part of your credit score depends on the percentage of your total credit limit you use.
- Paying down balances and eliminating debt reduces the amount you need to pay toward your debts every month. When lenders calculate a debt-to-income (DTI) ratio, lower monthly payments make it easier to qualify for new loans or debt.
Best Practices for Working With Co-Signers
If you apply for a personal loan with a co-signer, take steps to avoid problems.
Make It Temporary
Whenever possible, borrow from lenders that allow for a co-signer release. For example, lenders might allow the co-signer to remove their name from the loan after you make 36 or 48 on-time payments. If a release is not available, consider refinancing into a new loan that you obtain on your own as soon as possible.
Discuss the Details
Have a conversation to ensure your co-signer understands the risk, the required payments, and the impact on their ability to borrow. Even though you may have every intention of repaying, life can surprise anybody. For example, if you get injured in an accident and can’t work to make money to pay off the loan, can the co-signer comfortably cover your payments?
Communicate When Trouble Arises
If you can’t make a payment, notify the co-signer and discuss the situation before your due date. Proactive conversations can prevent damage to your credit and uncomfortable situations down the road. The co-signer might choose to make payments for you instead of having you miss payments (leading to fees and negative items on both of your credit reports).
The Bottom Line
A co-signer can help you get approved for a personal loan, and you might qualify for better interest rates with their help. But co-signing is risky, so it’s crucial for the co-signer to understand what’s at stake. Think about who might be a good co-signer, and whether you want to involve your finances in your relationship.