A co-signer is a person who helps a borrower secure a loan by agreeing to become legally responsible for repayment. This means that even if the co-signer has no plans to help repay the amount owed, they become responsible for the debt if the primary borrower defaults.
- If you have poor credit and can’t qualify for a personal loan on your own, having a co-signer with good credit and a strong income can help you get funded.
- While a co-signer doesn’t have to agree to make payments on a loan, they are legally responsible for making sure the loan is repaid.
- Co-signers take on incredible risk, since their personal credit will take a hit if payments are late or the loan goes into default.
What to Look for in a Co-Signer
You may need a personal loan with a co-signer if you’re unable to qualify for funding on your own, or if your credit rating limits you to loan options with less-than-stellar rates and terms. Since the point of having a co-signer is improving your chances at qualifying for better funding options, you’ll want to ask people who are in a stronger financial position than you are.
This can mean any (or all) of the following:
Having a co-signer with a “good” credit score, or a FICO Score of 670 to 739, can help you qualify for a personal loan with better rates and terms. If you have a close member of your family or a friend with “very good” credit (FICO Scores from 740 to 799) or “exceptional” credit (FICO scores of 800+), then your chances of securing a personal loan with the best possible rates and terms improve even further.
Low Debt-to-Income (DTI) Ratio
Lenders also look for loan applicants whose co-signers have a relatively low debt-to-income (DTI) ratio. This term is used to describe the amount of debt someone owes and how that debt relates to their income.
According to Discover, many lenders consider a DTI of 43% to be the threshold where creditworthiness begins to wane. This would be where someone’s regular monthly debt payments account for 43% of their gross monthly income.
A substantial and reliable income is another must when it comes to applying for a personal loan with a co-signer. After all, steady income shows lenders that an applicant and their co-signer can afford to repay the loan funds (plus interest) over time.
Advantages and Risks of Using a Co-Signer
If you need a personal loan but are unable to secure one without the help of a co-signer, you should consider the pros and cons of this arrangement before applying.
Advantages of Having a Co-Signer
- Acquire funding when you can’t qualify on your own: If you simply cannot qualify for a personal loan on your own, getting a co-signer lined up could help you get the funding you need.
- Qualify for better personal loan rates and terms: A co-signer with a great credit score and good income gives you a better chance of qualifying for lower interest rates and more preferable loan terms.
- Improve your credit score over time: Your credit score will steadily improve as you make on-time loan payments.
Risks of Using a Co-Signer
- Your actions can impact the co-signer’s credit score: Paying your bill late or defaulting on the loan will hurt your co-signer’s credit as well as your own.
- The arrangement can last years, which may be longer than you prefer: Some loans let you “release” a co-signer at some point in the process, but it’s not always an option.
- Your relationship may become strained: If you accidentally make payments late or repayment doesn’t go as planned, then the relationship you have with the co-signer could worsen.
Co-Signer vs. Co-Borrower
According to the Federal Trade Commission (FTC), a co-signer guarantees another person’s debt but doesn’t have any ownership of whatever the loan funds pay for. Ultimately, that’s where a co-borrower is different.
In the case of personal loans that allow joint applications, the co-borrower is just as responsible for repayment as the primary borrower. However, they also have rights to the loan funds or any collateral used to secure the loan.
Alternatives to Co-Signing
If you’ve been asked to co-sign a loan but are unsure whether or not it’s a good idea, you may want to consider some other options. These alternatives can provide you with another means of helping the primary borrower if you’re uncertain about putting your personal credit on the line.
- Offer to fund the loan with cash: If you’re willing to loan the borrower your own money, they could make payments to you over time. This would ensure that your credit isn’t damaged if they don’t meet their responsibilities, although it would also make you responsible for collecting payments.
- Apply for the loan on your own: You could also apply for the loan yourself and let the person you’re trying to help access the money. From there, they could make payments to you, which you could then use to repay the lender yourself.
- Offer collateral to help secure the loan: You could also supply collateral for a secured personal loan that an applicant applies for on their own. Collateral could be money in a savings account or certificate of deposit (CD), a car title, or something else.
What to Consider Before Co-Signing a Loan
Before you ask someone to become a co-signer on a personal loan, you should take steps to confirm that you cannot qualify without them. Fortunately, many lenders make it possible to “check your rate” or gauge your chances of approval before you move forward with an application.
Before you co-sign a personal loan for someone else, there are a number of important factors to keep in mind:
- Being a co-signer can limit your own borrowing options: As the FTC notes, your liability for a co-signed loan may prevent you from being able to borrow money on your own in some scenarios.
- You will have to repay the loan if the primary borrower fails to do so: If the primary loan applicant defaults on the loan, you will be legally obligated to repay it.
- Co-signing on a loan puts your personal credit at risk: You may be asked to co-sign because you have a high credit score, but this may not be the case for long if the primary borrower pays their loan bill late or not at all.
Will a Co-Signer Help Me Get Approved for a Personal Loan?
Having a co-signer with a solid income and good credit can help you get approved for a personal loan if you’re struggling to find funding on your own.
Does a Co-Signer Have to Be Present?
Whose Credit History Is Affected by a Co-Signed Loan?
When a loan is co-signed, the credit of the primary borrower and the co-signer can expect equal impact. The effect of this on credit for both of you is great when payments are made on time, but the opposite is also true when payments are made late or a loan goes into default.
The Bottom Line
Getting a personal loan with a co-signer can be a tricky situation, mostly because you have to find someone who agrees to put their credit at risk to help you. That said, this dynamic can also work just fine if you take borrowing seriously and always make your loan payments on time.
Before you take out a personal loan with a co-signer, you should look over your monthly income and regular expenses to ensure that you can afford the new loan payments. If you are unsure whether you can, or if you know money will be tight for the time being, then it may not be worth the risk.