What to Do When the Bank Says You Need a Cosigner
If your lender says you don’t qualify for a loan without a cosigner, it’s a signal that your credit scores or your income were not high enough for their requirements. With the right cosigner, you might get the funding you need.
How a Cosigner Helps
A cosigner helps you get approved for a loan by applying with you. To do so, they sign a document or use an electronic agreement with the lender, and they promise to repay the loan if you don’t pay for any reason.
The cosigner should have high credit scores and plenty of income.
A cosigner takes full responsibility for the debt—if you don’t pay off the loan, your cosigner will have to do so. If neither of you can pay off the loan, lenders will report the defaulted loan to credit bureaus, and credit scores for both you and your cosigner will fall. What’s more, lenders could potentially try to collect the amount due through legal action, which can further complicate matters.
Why You Need a Cosigner
When banks evaluate your loan application, they try to determine whether or not you will repay the loan. The most critical factors in the decision are your credit and your income.
Lenders review your credit history to see if you have borrowed and repaid loans in the past. If you’ve successfully paid off several loans, that’s a positive signal for lenders. If, on the other hand, you don’t have a borrowing history or you have defaulted on loans in the past, lenders are more hesitant to approve your loan. Lenders typically review your credit reports and use a credit score based on the information in your credit reports.
Take advantage of the law that allows you to review your credit reports from each of the three major credit bureaus once per year for free. This helps you to stay on top of any issues that may crop up on your reports.
Lenders also look at how much you earn and how much of your monthly income will go toward paying off the loan. If your loan payments take up a significant portion of your income, banks may worry that you’ll get in over your head. To evaluate your income, lenders calculate a debt-to-income ratio. For example, they might prefer to see that loan payments are less than 30 percent of your total income.
Adding a cosigner helps you meet lender requirements for credit and income. A cosigner provides an additional source of income that is available to help make loan payments, assuming the cosigner has a job. Ideally, you’ll pay off the loan yourself, but the lender wants to be safe—and with a cosigner, they can try to collect from two people, which improves the bank’s chances of finding somebody who can pay. If your co-signer has good credit, that also helps. Lenders prefer to know that somebody on the loan has experience borrowing and repaying.
Finding a Cosigner
If you want to use a cosigner, you need to find somebody with good credit and enough income to help your loan application get approved. In many cases, a family member or close friend act as a cosigner. Note that anybody who cosigns for you is taking a risk: They will be 100 percent responsible for paying off your loan.
Your cosigner fills out the loan application with you and provides the same financial details that you provide on the loan application. For example, they need to include their Social Security Number, date of birth, income, addresses, and other information. Have your cosigner bring identification if you’re applying for a loan in person.
Of course, you plan to pay off your debt by yourself, but life is full of surprises. An auto accident or sickness can easily render you unable to work and pay your bills. Be sure that your cosigner fully understands the risk and can really afford to take that risk before you put them in a difficult position.
Go It Alone
If you can’t find a cosigner or you prefer not to use one, you might still be able to borrow. Especially if you don’t need the money right away, you can work on building up your credit scores so that you can borrow on your own in the future. You need to do this anyway.
To improve your credit score, focus on paying your bills on time and using no more than 30% of your available credit. Those two factors combined account for nearly two-thirds of your credit score.
You might even get approved for a loan right now. For example, certain student loans are available to borrowers regardless of their credit score. Online lenders also might be willing to work with you, even with less-than-perfect credit—but make sure you stick with reputable lenders and avoid online payday loans. Finally, small local banks and credit unions may be less rigid in evaluating loan applications, especially if you have a checking account at the same institution.
Finally, you might get approved for a loan if you pledge collateral, but that’s extremely risky. If you use your car as collateral, it could get repossessed and you won’t be able to get to work, and car title loans are notoriously expensive. Using your home as collateral can lead to foreclosure, which puts you and your family in a challenging position.
Federal Trade Commission. "Co-signing a Loan." Accessed May 3, 2020.
AnnualCreditReport.com. "Request Your Free Credit Reports." Accessed May 3, 2020.
Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed May 3, 2020.
MyFICO. "What's in My FICO Scores?" Accessed May 3, 2020.