Getting a personal loan with a co-signer

Getting a personal loan can be tricky, especially with a less-than-perfect credit score. A great tip is to bring in a co-signer. It can improve your chances of getting better loan terms, like a lower interest rate. It's not just about approval; it's about making the loan easier to handle.

But, like any major investment, it's key to know what you're getting into. We'll go over the good things about using a co-signer, what everyone involved needs to take care of, and even other ways to get money if a co-signer isn't going to work for you.

Before we get started, here’s the subjects to be covered:

• What is a co-signer, and how can they benefit your loan?
• How do personal loans with co-signers work?
• The risks and responsibilities of co-signing
• How to apply for a personal loan with a co-signer
• Pros of co-signed personal loans
• Cons of co-signed personal loans
• Alternatives to getting a personal loan with a co-signer
• FAQ
• The bottom line: Co-signers can improve your chance of loan approval

What does it mean to get a personal loan with a co-signer?

Personal loans are handy for all sorts of things, giving you one lump sum to spend as you see fit. People often use them to pay off credit card debt, fix up their homes, handle medical costs, or even pay for a wedding. They're liked because they’re flexible but still have a set structure.

But what happens if you don't quite qualify for a loan on your own? Maybe your credit isn't great, or you haven't built up much credit history. That's when using a co-signer can be a smart move. A co-signer can help you get approved when you wouldn't be otherwise or get a loan with better terms. Basically, they use their good credit to back up your application, which makes the lender feel more confident about getting their money back.

How a co-signer reduces lender risk and benefits you

Think of a co-signer as a financial safety net for the lender. When you apply for a loan with a co-signer, the lender evaluates both your creditworthiness and your co-signer's. If your co-signer has excellent credit, a solid income, and a history of responsible borrowing, they significantly reduce the risk that the loan will go unpaid. This decreased risk is precisely what encourages lenders to offer more attractive terms to the primary borrower, such as:

• Lower interest rates: With less risk, lenders are often willing to offer a lower annual percentage rate (APR), saving you money over the life of the loan.
• Better loan terms: You might qualify for a longer repayment period, more flexible payment options, or a higher loan amount than you'd receive on your own.
• Increased approval odds: For those with less-than-perfect credit, a co-signer can be the difference between approval and denial.

The responsibilities of a co-signer

It's vital for both the primary borrower and the potential co-signer to fully grasp the weight of this responsibility. A co-signer isn't just vouching for you; they are legally committing to the loan.

If the primary borrower defaults on the loan or stops making payments for any reason, the co-signer becomes 100% responsible for the entire outstanding loan balance, including any fees and accrued interest. This means the lender can pursue the co-signer for repayment, which could impact the co-signer's credit score, lead to collection efforts, or even result in legal action. This is why co-signing is a serious commitment that should only be undertaken after careful consideration and open communication between all parties. For more ideas on how you can use a personal loan, explore our guide on what you can do with a personal loan.

Who can be a loan co-signer?

Choosing a co-signer is a big deal. The right person can make all the difference. Generally, a co-signer needs to be at least 18 years old and meet certain requirements that prove they can repay the loan if needed.

Good co-signer candidates usually have:

• A strong credit score: Lenders want to see a good to excellent credit score because it shows they know how to handle credit.
• Stable income: A steady and verifiable income is important because it shows they can make the monthly payments.
• A low debt-to-income (DTI) ratio: This is a key number for lenders. It compares how much you owe each month to how much you earn. You calculate it by dividing your total monthly debt payments by your gross monthly income.

Understanding the debt-to-income ratio

Your DTI is a tool for assessing how your monthly debt payments compare to your income. To calculate it, just divide your total monthly debt (like credit cards, loans, and rent or mortgage) by your gross monthly income (your income before taxes).

For instance, if your monthly debt payments (credit cards, existing loans, rent/mortgage) total $1,500 and your gross monthly income is $4,000, your DTI would be 37.5% ($1,500 / $4,000 = 0.375).

Lenders analyze your DTI to determine whether you can handle your monthly payments and if you can take on more debt. A lower DTI means your finances are less strained, which makes you a stronger loan applicant. Usually, a DTI of 36% or less is often deemed healthy, although some lenders might accept higher DTIs depending on additional factors.

Co-signer vs. co-borrower

Many commonly mix up co-signer and co-borrower, but there is a crucial difference, especially when it comes to the law and lender perspectives. It's important to be aware of the difference if you're considering sharing responsibility for a loan.

A co-signer gives the lender extra security. They agree to pay if the main borrower can't. However, co-signers have no access to any of the loan money. They only take on the risk of payment. They're there to make the borrower's loan application appear more favorable and to protect the lender.

A co-borrower is also responsible for the loan, but they are equally entitled to the funds. Usually, they're involved in whatever the loan is for and share in the benefits. Think of a married couple getting a mortgage together; they're co-borrowers. Both are responsible for the loan, and both own the house. Knowing these differences makes everyone aware of where they stand and understand their financial duties.

How do personal loans with co-signers work?

When you apply for a loan with a co-signer, both you and the co-signer are legally responsible for paying it back. If you can't make your payments, the lender can take the money directly from your co-signer. Your co-signer is a financial backup, using their good credit and income to help you get the loan. Their financial trustworthiness gives the lender extra reassurance, which can make it easier to get approved and get better loan terms.

Removing a co-signer from a loan

The great news is that a co-signer isn't stuck on a loan for good. Often, you can get to a place where they can be taken off.

Many lenders have a co-signer release option. If you meet some requirements, your co-signer can be removed from the loan agreement. Usually, this means making payments on time for a while (like 12 – 24 months) and having a credit score that shows you can handle the loan yourself. This tells the lender you’re now a safe bet.

Another way to remove a co-signer is by refinancing the loan. If your credit score is better and your finances are solid, you might be able to get a new loan just in your name. This new loan would pay off the old one, releasing your co-signer from their duty.

When a co-signer loan makes sense

A co-signer loan can be a good way to start borrowing, opening doors that might otherwise be closed. A co-signer makes sense when the borrower:

• Has no credit history: If you're just starting out, a co-signer with established credit can provide the track record needed for approval, helping you build your own credit.
• Has a high debt-to-income ratio: Lenders use your DTI to see if you can handle debt. A co-signer with a lower DTI can balance the risk, making your application better.
• Needs to borrow a larger amount of money: For big expenses, a co-signer's strong financial profile can give lenders the security they need to approve a larger loan.
• Is self-employed: Lenders often prefer predictable W-2 income. A co-signer can provide the financial stability and income assurance they want, especially when applying for a loan while self-employed.

Does being a co-signer affect your credit?

When you co-sign, you're legally responsible for the whole loan. If the borrower can't pay, the lender will seek payment from you for the money owed, plus any fees and interest. This could cause real money problems and might even lead to collection agencies or lawsuits.

Also, the loan shows up on your credit report. If the borrower is late on payments, your credit score will take a hit, which can make it harder for you to get loans or credit in the future. Co-signing also increases your debt-to-income ratio, something lenders look at when they decide whether to give you credit.

Pros and cons of personal loans with co-signers

Considering a personal loan with a co-signer is a big decision with potential benefits and risks for everyone involved. To help you make the most informed choice, it's wise to fully understand the advantages and disadvantages of co-signed personal loans.

Pros of co-signed personal loans

Opting for a personal loan with a co-signer can introduce significant financial opportunities. Here are some of the key advantages:

• Build credit: A co-signed loan helps you establish or improve your credit history with on-time payments, and you can learn more about how to improve your credit score.
• Qualify for a lower interest rate: A co-signer's strong credit can lead to a more favorable, lower interest rate.
• Receive a larger loan amount: With a co-signer's added security, you may qualify for a higher loan amount.

Cons of co-signed personal loans

While co-signed personal loans offer clear benefits, it's also important to be aware of the potential downsides. Here are some key challenges to consider:

• Missed payments negatively impact credit: Late or missed payments by the borrower also appear on the co-signer's credit report.
• Loan impacts borrowing limits: The loan is factored into the DTI for both parties, potentially limiting future credit.
• May strain relationships: Financial stress from the loan can put a significant strain on personal relationships.

What to consider before co-signing a personal loan

Co-signing a personal loan is a significant act of support, but it comes with distinct responsibilities and potential risks. Here are some other considerations and risks to think about before co-signing a loan:

• You could be responsible for full repayment: If the borrower defaults on their debt obligations, you as the co-signer are responsible for the entire original amount, plus any collection costs or late fees.
• Creditors may come to you first: It's possible for a creditor to seek payment directly from you before pursuing the borrower, and they could even sue you or garnish your wages.
• States have different co-signing laws: Your state's laws may offer additional protections, such as requiring lenders to attempt collection from the borrower first.
• You may not be notified of late payments: Unless specifically stated in the contract, you might not be informed of missed payments, only discovering them when reviewing your credit report or score.
• Your DTI could go up: The co-signed loan factors into your debt-to-income ratio, which could negatively impact your ability to get approved for your own loans in the future.

How to 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 a co-signer's information to your application. Not all lenders, whether traditional banks or online platforms, offer this option.

Once you've narrowed down your choices, research various lenders, including traditional banks, credit unions, and online lenders, to secure the best loan terms and interest rate. This ensures both you and your co-signer feel confident you're getting the most favorable deal. When shopping around, always look out for any potential origination fees and prepayment penalties.

To get a personal loan, both the borrower and the co-signer must submit their personal and financial information. During the application process, 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

Both applicants can expect a hard credit check after submitting the full application. This will slightly and temporarily lower the credit score of both the borrower and the co-signer.

Alternatives to getting a personal loan with a co-signer

While a co-signer can be a valuable partner in securing a loan, we understand that asking a friend or relative to co-sign might feel uncomfortable for some borrowers. The good news is that numerous alternative financing solutions exist to help you achieve your financial goals without relying on a co-signer.

Secured personal loans

A secured personal loan is another option. It's backed by something you own, like your house, car, jewelry, or savings. To get approved, the lender will want one of these assets as security. Since the collateral lowers the lender's risk, they usually only let you borrow a portion of the item's value. Keep in mind that if you can't make payments, the lender can take your collateral to get back their money. If you want to know more, check out our secured loans guide.

0% APR credit cards

A 0% APR credit card can be a smart move, especially when you need to handle short-term money issues. These cards usually give you a break with a 0% interest rate for a while, maybe from a few months to a year or more. This lets you use some of your credit to cover bills or other costs without paying interest at first. Still, before you get one, it's a good idea to plan out how you'll pay it back. This is key because after the initial low-interest time is up, anything you still owe will start collecting interest, and that can really add up.

Family loans

Family loans are just what they sound like: loans between family members. These can be easier to work with and might have low or no interest, which is nice if getting a regular loan is hard.

Even with family, it's good to be clear about things. If the family member who's lending wants a more formal deal, it should spell out the details, like when payments are due and any interest. The main problem with these loans is they can cause problems in the family if people disagree or if the person borrowing can't pay back the loan. Money problems can really mess up personal relationships. To learn more, check out our guide on family loans.

FAQ

Here, we encourage you to explore the most common questions people ask about co-signers for personal loans, providing clear and concise answers to help you navigate your options.

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 reasonably good interest rate. For more information on starting your credit journey, explore our guide on first-time personal loans with no credit history.

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 to see if this is available.

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 generally around 650. Anybody co-signing your loan should ideally have this credit score at minimum, though not all lenders strictly require it. For more details on credit score requirements, refer to our page on credit scores for personal loans.

What are the chances of getting a personal loan with a co-signer?

Having a co-signer with good credit can significantly improve your chances of qualifying for a personal loan. Your co-signer’s creditworthiness provides the lender with assurance that your debt will be repaid even if you default or miss payments. It is still always important to strive to make all your monthly payments on time to benefit both your credit and your co-signer's.

The bottom line: Co-signers can improve your chance of loan approval

A co-signer can significantly boost your personal loan approval chances, potentially securing better rates and larger amounts, especially if your credit history is limited. This partnership offers a pathway to financial goals, but it comes with serious responsibilities. A co-signer is legally accountable for the full loan if you default, impacting their credit and finances, so open communication and diligent repayment are vital.

While Rocket Loans^SM currently doesn't use co-signers, you can still explore your options. We encourage you to get prequalified for a personal loan to understand how much you may be able to borrow directly, empowering your financial journey.