Personal Loans and Co-signers

Personal loan applicants who want to increase their chances of getting approved (or get better loan terms) can try adding someone to their loan.

There are several terms for people who apply for personal loans together. A co-borrower, co-maker or joint applicant is entitled to some share of the loan proceeds and is also obligated to repay the loan.

A co-signer or guarantor is not entitled to the loan proceeds and is only liable for repayment if the primary borrower defaults on the loan. In some cases, a person may be a co-signer but not a co-borrower – for example, if the lender is a credit union and the person isn’t a member. Only members of credit unions can borrow from them, but anyone legally able to sign a contract can be a co-signer.

Personal Loan Approval and Co-signers

Lenders may require co-signers or guarantors if the primary applicant isn’t strong enough on his or her own to qualify for a personal loan. The co-signer’s qualifications are examined thoroughly – with a credit check, income verification, and anything else the lender requires to document the ability to repay the loan.

Co-signers and Personal Loan Interest Rates

Personal loan interest rates are determined by the credit grade assigned to the applicant. In most cases, the fact that the guarantor has a better credit grade won’t get the applicant a better rate. For example, the National Credit Union Association (NCUA) guidelines specifically state that the interest rate on its member organizations’ consumer loans must reflect the credit grade of the primary applicant, not the guarantor.

What this means is that people who need a co-signer because their credit is stinky would not get a lower rate from a credit union, but they might from non-CU institutions. They’d need to shop more carefully and ask about guarantors and their effect on the interest rate.

Co-signers and Income Underwriting

Can a co-signer help when the borrower’s income is insufficient? Having a co-signer can help applicants get approved if their debt-to-income ratio (DTI) is too high. The co-signer’s DTI must meet income guidelines under the assumption that he or she will be making the personal loan payments. In addition, the co-signer’s assets are considered. A co-signer has more impact on the application if he or she has assets that could be used to pay the loan if the primary borrower defaults.

Disadvantages for Co-signers

Co-signing offers no financial benefit to the guarantor and comes with many disadvantages.

If the lender reports to credit bureaus, the loan payments show up on both the borrower’s and co-signer’s credit history. If the borrower pays late or defaults on the loan, the co-signer’s credit score is harmed. In addition, if the co-signer applies for a mortgage, the personal loan payment (called a “contingent liability”) may be counted as a monthly obligation even if the borrower makes all the payments on time.

According to the Federal Trade Commission, about 75 percent of people who co-sign end up paying the debt. Borrowers who want co-signers can improve their chances of getting one by offering collateral to the guarantor.

Some lenders release the co-signer if the borrower pays the account on time for a year or two.

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