What to Do When the Bank Says You Need a Cosigner

Financial Maze
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Your lender has decided that your credit scores or your income are not high enough for them to approve your loan request. However, the bank might be willing to approve your loan if somebody else applies for the loan with you.

How a Cosigner Helps

A cosigner is a person who helps you get approved for a loan. The cosigner (who presumably has strong credit and income) promises to ensure that the loan gets repaid by signing the loan agreement with you. In other words, the cosigner takes full responsibility for the debt – if you don’t pay off the loan, your cosigner will have to do it. If neither of you can pay off the loan, then both of you will see lower credit scores (and possibly further attempts to collect through legal action).

There are two ways to move forward from here:

  1. Find a cosigner, or 
  2. Work on getting a loan on your own – without any cosigner.

Why You Need a Cosigner

When banks evaluate your loan application, they try to determine whether or not you will repay the loan. In general, they look at two things: your credit and your income.

  • Credit: 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, you’re a fairly safe bet. If, on the other hand, you don’t have a borrowing history – or you have defaulted on loans in the past – lenders are less willing to approve your loan. Lenders might look at your credit reports (which you can and should do every year – it’s your right under federal law), or they just use a credit score based on the information in your credit reports.
  • Income: 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 big portion of your income, they worry that you’ll get in over your head. To do this, lenders calculate a debt to income ratio (for example, they might want you to keep your loan payments below 30% of your total income).
  • Adding a cosigner helps you meet lender requirements for credit and income. A cosigner (assuming they have a job) adds a second income that is available to help make loan payments. 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, in the bank’s opinion, is better than one). If your cosigner has good credit, that also helps – at least somebody on the loan has experience borrowing and repaying. Read more about how cosigning works.

    Finding a Cosigner

    If you want to use a cosigner, you’ll 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 big risk: they will be 100% responsible for paying off your loan.

    Of course, you plan to pay it all yourself, but life is full of surprises (an auto accident can easily render you unable to 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.

    Your cosigner will need to fill out the loan application with you and provide the same financial details that you’ve provided on the loan application. For example, they’ll 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.

    Go It Alone

    If you can’t (or don’t want to) find a cosigner, 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.

    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 might also be willing to work with you, even with less-than-perfect credit – but make sure you stick with reputable lenders and avoid the online payday loans.

    Finally, you might get approved for a loan if you pledge collateral – but this is 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 your family in a very difficult position.