Getting A Personal Loan With A Co-Signer
Miranda Crace8-Minute Read
UPDATED: March 07, 2023
Borrowing a personal loan requires you to have good or excellent credit if you want the best interest rate. If you’re not sure you can qualify for a personal loan but know someone who can, you could have that person co-sign a loan with you so you can benefit from their creditworthiness.
Whether you’re the loan applicant or the person co-signing, some key items are worth considering before you sign on the dotted line. Let’s explore how getting a personal loan with a co-signer works, and the risks involved for both parties.
What Does It Mean To Get A Personal Loan With A Co-Signer?
You can use personal loans for a variety of reasons, like home improvement projects, debt consolidation and unexpected costs you can’t cover out-of-pocket.
A co-signed personal loan is an avenue for people who can’t qualify for a loan on their own – due to poor credit or financial standing – to obtain funding by adding someone else’s credit score and income to their application. In some cases, adding a qualified co-signer to a loan application can help you be approved for a higher loan amount and lower interest rate, too.
When you co-sign a loan, you become legally responsible for the repayment of that loan. As the co-signer, you also agree to repay the loan if the borrower doesn’t.
It can be difficult for someone with bad credit to get a personal loan without a co-signer. Having a person with good credit co-sign the loan can help a borrower get approved, even if they don’t meet the lender’s requirements on their own. However, this comes with a lot of risks for the co-signer.
Co-Signer Vs. Co-Borrower
The biggest difference between a co-signer and a co-borrower is that a co-borrower has equal access to the loan money. A co-signer guarantees that the loan will be repaid even if the borrower defaults, but a co-signer can’t access the funds.
How Do Personal Loans Work With A Co-Signer?
When you get a personal loan with a co-signer, both parties are on the hook for the entire duration of the loan. The co-signer is as legally responsible for repayment as the borrower.
This means that co-signed loans and all the activity associated with them, including payment history, will also show up on the co-signer’s credit report. If you co-sign a loan and the borrower misses monthly payments, the lender will expect you to make them. If you don’t, your credit score will take a hit.
The co-signer is typically responsible for a co-signed loan until it’s paid off. In some cases, you may be able to apply for a co-signer release, which will allow you to remove your name from the loan if the borrower meets certain requirements, such as making a specified number of on-time payments and meeting the lender’s credit standards.
Co-signer releases are common with private student loans, but you may also have this option on other types of loans. Before signing any loan agreements, talk with the lender or read your loan documents to find out if you have this option as a co-signer.
Another way to remove your name from a loan before it’s paid off is for the borrower to refinance to a new loan in their name only. This requires the borrower having the credit history and income to qualify for a loan on their own.
What To Consider Before Co-Signing A Personal Loan
If you’re thinking of co-signing a personal loan to help a friend, loved one or business associate, you should be fully prepared to make every single payment on the loan until it’s completely paid off. If your finances can’t handle that or you simply don’t want to take on that responsibility, you shouldn’t co-sign the loan. The loan is legally your responsibility, too, and you should treat it as such when deciding whether you can afford to take it on.
Keeping that in mind, here are some other considerations if you’re undecided on whether to co-sign.
Know Your Rights
It’s important to understand your rights as a co-signer on a loan. Federal law requires that lenders provide you with a co-signer’s notice listing all your obligations. Here’s what that notice will say, according to the Federal Trade Commission (FTC):
- You’re being asked to guarantee this debt. If the borrower doesn’t pay the debt, it’s yours to pay. Be sure you can afford to pay, if it comes to that, and that you want to accept this responsibility.
- You could be responsible for full repayment. You may have to pay up to the full amount of the debt if the borrower doesn’t You may also have to pay late fees or collection costs, which increase this amount.
- Creditors may come to you first. The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that they use against the borrower, and this includes suing you or garnishing your wages. If this debt is ever in default, that may show up on your credit history.
- The notice isn’t a contract. This notice isn’t the contract that makes you liable for the debt. It’s important to note that the official loan documents – not the co-signer’s notice listing – make the co-signer legally responsible for the personal loan.
Your state may provide more extensive protections for co-signers. For example, state law may require that lenders first attempt to collect payments from the borrower before collecting from the co-signer. Or, your state may mandate that lenders inform co-signers when a loan has become delinquent.
Make sure you know your state’s laws and the kind of protection you can (and can’t) expect.
Understand The Contract
You may be able to have certain protections included in your contract as well. Take the time to read all the relevant loan documents and make sure you know what agreements you’re making with the lender.
Pay attention to whether the lender will notify you of late payments. If this clarification isn’t included in the contract, ask for it to be included in writing. This way, you won’t be in the dark if things start to go south on the loan.
According to the FTC, you may be able to negotiate some of your liability with the lender. For example, you may ask whether it’s possible for you to only be liable for the principal balance. If so, you’ll be responsible for the loan but not any late fees or legal costs the borrower may incur.
Finally, get your own copies of all the important loan documents.
Consider Your Debt-To-Income Ratio
One often overlooked aspect of co-signing a loan is how it can affect your finances even if everything goes according to plan.
Remember that when you co-sign a loan, creditors view the loan as belonging to you. This impacts your debt-to-income ratio (DTI) – the portion of your income that you spend on debt payments each month.
If the co-signed loan pushes your DTI too high, you may have difficulty getting approved for your own loan even if the borrower has made every loan payment on time.
If you’re thinking of applying for a mortgage in the near future, you’ll want to keep your DTI below 50%. If co-signing a loan pushes your DTI past this point, you may want to reconsider.
If you’re going to co-sign a loan, you’ll need to have an open and candid conversation with the borrower about their finances, your finances and whether the borrower can handle the monthly payments.
It can be an awkward discussion, but having a better idea of the borrower’s financial situation can help you keep tabs and better evaluate your risk. For example, do they have an emergency fund that could cover their monthly payments if necessary, or will they expect you to back them up if they have a financial emergency?
You should also consider asking the borrower for access to the loan account, which means having log-in credentials if the loan information is available online. This way, you can check in each month to make sure the loan is still current and payments are being made in full and on time.
The Pros And Cons Of Personal Loans With Co-Signers
Now that you understand how co-signed personal loans work, let’s review the benefits and drawbacks of getting one.
The Pros Of Co-Signed Personal Loans
- The borrower builds credit. It’s no secret that the borrower primarily benefits from obtaining a loan with the help of a co-signer. By making timely payments on a personal loan, the borrower will build credit and increase their credit score over time.
- The borrower qualifies for a lower interest rate. By applying for a loan with a co-signer, the borrower will most likely receive a lower interest rate than if they applied on their own. This benefits both parties because the total cost of repaying the loan will be lower, and easier for the borrower to pay back without assistance from the co-signer.
- The borrower may get a higher loan amount. Similar to qualifying for a lower interest rate, the borrower is likely to receive a higher loan amount when a co-signer is involved.
The Cons Of Co-Signed Personal Loans
- Any missed payments would lower both credit scores. If the borrower misses loan payments or stops paying altogether, both parties’ credit score will suffer. This could seriously affect the financial future of the borrower and the co-signer, including their ability to qualify for new loans.
- The debt limits the borrowing power of both parties. Since lenders examine your debt-to-income ratio to approve new financing, the personal loan debt from co-signing a loan could limit your borrowing power until the loan is paid off. For the borrower, a co-signed personal loan on their credit report could be viewed by potential future lenders as risky.
- The borrower and co-signer risk their relationship. If the borrower can’t make the loan payments and the responsibility falls on the co-signer, the borrower and co-signer risk damaging their relationship. That’s why it’s important for both parties to communicate their financial standing, expectations and responsibilities before signing the loan documents.
How Do I Apply For A Personal Loan With A Co-Signer?
If you’re ready to apply for a personal loan with the help of a trusted co-signer, the first step is to find a lender that allows you to add their information to your application. Not all lenders, traditional or online, allow co-signers.
Once you’ve narrowed down your options, shop around various lenders to find the best loan terms and interest rate. That way, both parties can feel confident they’re landing the most favorable deal.
To get a personal loan, the borrower and the co-signer must submit their personal and financial information. Both parties can expect to provide the lender with the following documentation and info:
- Current address
- Pay stubs
- Bank account information
- Tax forms
- Social Security number
- Bank statements
FAQs About Personal Loans With Co-Signers
Here are some questions people often ask about personal loans with co-signers.
Do I need a co-signer for a personal loan?
You may want to consider a co-signer if you have poor credit or no credit history, but having a co-signer isn’t a requirement for a personal loan. Applicants with a credit score of at least 650 should qualify for a personal loan and secure a good rate.
Can I get online loans with a co-signer?
As with some traditional lenders, some online lenders won’t allow you to have a co-signer on a personal loan. As you shop around for the right lender, ask your prospects about their co-signing options.
What credit score does a co-signer need for a personal loan?
The minimum credit score for a personal loan, if you want a good interest rate, is 650. Anybody co-signing your loan should have at least the qualifying credit score, but not all lenders necessarily require this.
What are the chances of getting a personal loan with a co-signer?
Having a co-signer with good credit can improve your chances of qualifying for a personal loan. Your co-signer’s creditworthiness can assure the lender that your debt will be repaid even if you default or miss payments. With this in mind, still strive to make all your monthly payments on time.
Getting a personal loan with a co-signer can increase your odds of being approved, and it can land you better rates than if you applied alone. However, a co-signer runs the risk of having to repay the loan if the borrower defaults. Consider the risks and any protections afforded you as a co-signer before agreeing to this responsibility. Communication between borrower and co-signer is also key.
Rocket Loans℠ doesn’t offer co-signing options, but if you start an application today, you can see the rates and terms you qualify for.
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