What To Know When Adding a Cosigner to a Loan
- Cosigners can help you qualify for loans, borrow more money and even get lower interest rates.
- Cosigners can’t access the loan money, but they’re legally responsible for paying off the loan if the primary borrower stops making payments. Missed or late payments will hurt their credit.
- Cosigners are different from co-borrowers, who have a right to the loan money and equal responsibility for payments.
If you need a personal loan but don’t qualify because of your credit, applying with a cosigner could help. A cosigner could also open the door to lower interest rates and better terms.
But adding a cosigner to your loan can be tricky, and so can finding a lender that allows one. To smooth out the process, here’s everything you need to know about adding a cosigner for a personal loan.
How cosigning works
A cosigner is someone you add to your personal loan as a guarantee for the lender. You and your cosigner have equal responsibility for the loan. As such, if you make late payments, both of your credit scores will suffer — and if neither of you pays back the loan, the lender can sue you both for default.
However, as long as you hold up your end of the deal, your cosigner has nothing else to do with your loan and they won’t have legal rights to your loan money.
Adding a cosigner reduces the lender’s risk, especially when your cosigner has a strong credit history. In turn, the lender may approve your loan application even if you don’t meet its personal loan requirements. A cosigner can also help you qualify for a lower annual percentage rate (APR) and/or higher loan amount than if you applied on your own.
How to get a personal loan with a cosigner
Once you’ve found a willing (and creditworthy) friend, family member or business partner, you might find the best personal loan with a cosigner by following the steps below:
Check your credit scores
Your credit score isn’t the only thing that can make or break your ability to get a personal loan, but it’s often the most significant factor in determining your eligibility and APR. Both you and your potential cosigner should check your credit scores before shopping for a loan.
Checking your credit scores can help you narrow down your list of lenders and determine if the interest rates they offer are competitive for your scores. Compare your offers to the average APRs by credit band according to LendingTree data:
| Credit tier | Average APR |
|---|---|
| Excellent (800 and above) | 15.75% |
| Very good (740-799) | 17.89% |
| Good (670-739) | 23.27% |
| Fair (580-669) | 27.79% |
| Poor (under 580) | 30.25% |
Gather documents for you and your cosigner
When you apply for a personal loan, the lender could ask you and your cosigner to provide copies of documents like your driver’s license (or another type of government identification), paystubs or W-2s. These will serve as your proof of identity, employment and income.
Getting these documents ready in advance can help reduce the back-and-forth between you and your cosigner (especially if you don’t live in the same household).
Prequalify
If you’re applying with a cosigner, you’re probably already working on improving your credit. But applying for a personal loan generally requires a hard credit pull, which can cause your credit score to drop.
Prequalification doesn’t hurt your credit score, as it lets you see your potential rates with only a soft credit check. Think of prequalification like a quote — it doesn’t guarantee approval, but it can give you an idea if you and your cosigner are eligible for a loan and at what terms.
Apply
After you’ve picked a lender, you’ll need to complete a loan application. You’ll answer questions about yourself and your cosigner, and provide the documents you previously gathered.
How long it takes to get a personal loan will depend on several factors. The approval process on cosigned loans tends to take a little longer, since the lender has to evaluate two people’s creditworthiness instead of one. Keep this in mind if you’re on a tight schedule and are considering a quick loan.
Begin repayment
Once you’re approved, your money could be available as soon as the same day. The typical range is from the same day to five business days, but it varies by lender. Most of the time, the lender will deposit your funds directly into your checking account, and your first loan payment will be due about 30 days after you get your money.
Common cosigner requirements
Choosing the right cosigner is essential if you want to qualify for a personal loan with the best rates and terms. Typically, your cosigner should have:
- Good-to-excellent credit: Your cosigner should have at least good credit (670+ FICO Score), but the most effective cosigners have excellent credit (800+).
- Steady income: Your cosigner has to make monthly payments on the loan if you can’t. For this reason, your lender will want to see that your cosigner has steady (and sufficient) income.
- Acceptable debt-to-income ratio: Part of qualifying for a personal loan is demonstrating to the lender that you and your cosigner bring in more money than you owe. This is measured with your debt-to-income ratio.
- U.S. citizenship or permanent residency: Many lenders only offer loans to U.S. citizens or permanent residents. Your cosigner should also be at least 18 (or the age of majority in your state).
Before signing on a loan together, it’s important to get on the same page about the new debt you’re taking on. Whether you’re the borrower or the cosigner, you’ll be increasing your debt-to-income ratio as well as taking on the potential risk that comes with taking out a loan.
Consider things like impact to your credit and any options for eventual cosigner release, such as refinancing. Also, make sure you have a contingency plan if the borrower falls behind on payments. Since both parties are equally liable for the loan, is the cosigner willing and able to help out? If not, both individuals may want to reconsider signing together.
Pros and cons of using a cosigner for a loan
Pros
- Better approval odds. Adding a cosigner could boost your odds of personal loan approval.
- Better loan terms. Cosigners can help unlock lower APRs or higher loan amounts than you would get on your own.
- Could help build credit. Adding a cosigner to get a loan and then making on-time payments can improve your credit score.
Cons
- Damaged relationship. You could put your relationship with your cosigner at risk if you don’t pay back your loan.
- Limited lender selection. Not all lenders offer cosigned personal loans.
- Removing a cosigner can be difficult. You might have to make years’ worth of on-time payments before you can remove your cosigner (if you can remove them at all).
Where to find a personal loan that allows cosigners
Not all lenders allow applicants to include cosigners, so you may need to do a little shopping around.
First, check your bank or local credit union for cosigned loans with low APRs. Some online lenders allow cosigners, but many offer joint personal loans with co-borrowers instead.
When a cosigner can help
If you’re building (or rebuilding) credit: Adding a cosigner could be the only way to qualify for a personal loan if you have bad credit or are new to credit. The good news? If you qualify with a cosigner and make your loan payments on time every time, you can improve your credit over time.
If you’re in a financial emergency: Emergency loans can be a lifesaver in the face of unexpected expenses since you can use them for almost anything. Depending on your credit profile, you may still need to add a cosigner to qualify.
If you’re a freelancer: It’s common for a freelancer’s income to fluctuate. Using a cosigner with a stable income will likely make lenders more confident in your ability to pay back your loan.
If you’re taking out private student loans: You can’t include a cosigner on most federal student loans, but that’s not the case with private loans. Young adults typically have thin or no credit, so most private student loans require cosigners.
Alternatives to cosigned personal loans
If you can’t (or don’t want to) add a cosigner to your personal loan application, you could still get the money you need by exploring other options.
Joint personal loan
It’s easy to get cosigned loans and joint personal loans confused, but they’re not the same. Unlike a cosigner, the person you include on a joint personal loan (called the co-borrower) has equal rights to the loan money. For that reason, many people buy shared items with a joint personal loan.
Adding a creditworthy co-borrower to a joint loan can help you qualify and give you access to better loan terms. Many lenders that don’t allow cosigners offer joint loans instead, which could widen your lender pool.
Secured loans
If you don’t qualify for a traditional personal loan, consider applying for a secured loan by offering collateral like your car or bank account. Lenders are more likely to approve secured loans because they can take your collateral if you stop making payments.
Secured loans are risky, so make sure you can afford your monthly loan payment before offering up valuable assets.
Personal loans for bad credit
Some lenders specialize in personal loans for bad credit. These loans are easier to get, but there’s a catch — they typically come with higher APRs, making them more expensive.
If you’re interested in a bad credit personal loan, learn to recognize the signs of predatory lending. Unethical lenders take advantage of borrowers in desperate situations, but there are reputable lenders that offer loans for bad credit.
Frequently asked questions
Yes, your loan will show up as debt on your cosigner’s credit report. This could affect their ability to get more loans until this loan is paid off.
Your loan’s payment history will also show up on your cosigner’s credit report and can affect their score. On-time payments could improve your cosigner’s credit score, but late payments will hurt their credit.
It’s possible to remove a cosigner, but it ultimately depends on whether your lender offers cosigner releases. Some lenders don’t offer releases, and those that do typically require you to make a designated number of on-time payments before releasing your cosigner.
If cosigner release isn’t an option, you could remove your cosigner by refinancing your personal loan and putting it in your name only.
Cosigners can be anyone from trusted friends and family members to business partners. Choose someone whom you trust and who trusts you in return. Remember, your cosigner is responsible for repaying the loan if you can’t, so late or missed payments could cause a rift in your relationship.
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