Personal Loans With a Cosigner: Getting a Joint Personal Loan
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A personal loan is an unsecured loan you can use for a range of purposes — from consolidating debt or paying for a wedding to funding emergency repairs on your vehicle or any other number of life situations where you need a large chunk of money quickly.
Personal loans are doled out as a lump sum and typically come with fixed monthly payments. You then spend the term of your loan paying off the balance and interest.
You may be able to qualify for a personal loan even if your credit isn’t excellent, but you’ll qualify for better terms with a better score. Some people may choose to bring on a cosigner for a personal loan to improve their chances of getting approved.
Your cosigner may have stronger credit and/or a better income than you do, which may help you qualify for better loan terms or even to get approved in the first place.
There are good reasons to take out a personal loan with a cosigner, but there are some negatives to consider, too.
- You may qualify for approval if your credit score or income would normally disqualify you.
- You may get more favorable loan terms if your cosigner has a better credit history or higher income than you do.
- Any missed or late payments won’t just affect you; they’ll affect your cosigner’s credit report, too.
- If you damage your cosigner’s credit, there’s a strong chance that your personal relationship will suffer.
- It can be difficult to have your cosigner removed from the loan.
Cosigner versus coborrower
If you cosign a loan, you will be held responsible for payments should the primary borrower fail to fulfill his or her financial obligation.
Nishith Krishna, director of student and personal loans at PenFed Credit Union, says that while some lenders allow for the removal of the cosigner from the loan after a set period of time, what he sees more often is the primary borrower refinancing the loan, removing the cosigner from any further obligation in the process.
Coborrowing is less common with personal loans and is treated differently than cosigning. In these arrangements, two parties have an equal stake in the money being borrowed — like a couple taking out a mortgage. The two parties will in all likelihood qualify for a higher mortgage limit than either one could individually. Business partners also frequently coborrow.
You typically cannot be removed from a loan as a coborrower. If you want to get out of the loan, the other party will have to agree to refinance in his or her name only.
In the event of a death, a cosigner’s or coborrower’s estate is typically accountable should the other party struggle. You may be able to dodge this requirement if your contract does not have a successor clause for cosigners, or if your state allows refinancing by the surviving party after the death of one coborrower.
How a cosigner can help you get approved for a personal loan
If you have less-than-perfect credit, or if you have a thin credit file simply because you are young, a cosigner with a stronger credit score can help you qualify for your personal loan. Because that person has demonstrated responsibility with credit or has an income sufficient to make payments if you fail to do so, your lender knows your cosigner’s likely to come through should you fail to make on-time payments.
Sometimes a strong credit score isn’t enough to qualify for a personal loan. If you have a low income or no steady wage, lenders may consider you unable to repay your loan. If someone with a higher income is able to cosign your personal loan, your odds of approval may improve.
You may have enough income to qualify with a decent credit report, but you may not be offered the interest rate you were hoping for. In these situations, a cosigner might help. His/her income and credit history might help you qualify for a lower rate, saving you money over the course of your loan.
How to get your best rate on a personal loan
Whether or not you use a cosigner, there are several things you can do to increase your credit score and thereby qualify for better rates on your loan.
Lower your debt-to-income ratio (DTI)
An important part of your credit score is your DTI. This ratio measures how much collective money you owe to lenders against the amount of money you bring in. The higher the ratio, the harder it may be for you to manage your monthly loan payments.
There are two things you can do to lower this ratio and qualify for better rates. First, make a concentrated effort to pay down your debt. Second, do what you can to increase your income.
While both measures will help you increase your overall financial health, paying off your debt is usually the best one to tackle first. You may not be able to control getting a promotion at work or securing a move with a higher salary, but you can budget and make debt a priority.
Decrease your credit utilization
The higher your credit utilization, the more likely it is to negatively impact your score.
Typically, it’s suggested to have a utilization rate no greater than 30 percent. That means you’re not using more than 30 percent of your total available credit.
Let’s say you have three credit cards with a combined credit limit of $10,000. Your goal should be to never carry a balance of more than $3,000 across those cards at a given moment, because that will drive your utilization rate above that threshold. Utilization rate has a big impact on your credit score, and the lower it is, the better off your score will be.
To lower your utilization rate, you can pay down debts or consider requesting a credit limit increase, although that can potentially ding your score.
Make on-time payments
To preserve your credit score, make sure you are paying all of your bills on time every month. While it’s best to pay off any credit cards in full every month, be sure to make at least the minimum payment.
Compare loan terms to get your best rate
Loan terms can greatly impact the rate you are offered. For example, some lenders will offer you an interest rate decrease simply for setting up automatic payments.
Another instance where you may see lower rates is if you choose a longer loan term. Be careful, though. Paying a lower rate over a longer term can still end up costing you more in interest than paying a higher rate for a shorter period of time.
Use LendingTree’s personal loan tool to potentially compare several loan offers at once.
It’s important to note that comparing APR rather than interest rates is important when you’re taking out a personal loan. Almost all personal loans come with an origination fee, but some will advertise this fee separately from the interest rate. The APR factors in such fees, allowing you to get a better idea of who is actually offering your best deal.
Be sure to compare rates across lenders while remaining mindful of how loan terms may be affecting interest rate offers. You may even be offered multiple different rates by the same lender. This happens when a single lender offers you multiple loans with differing terms.
Even if you’re offered good terms, you should flag any loan offers that include these line items:
Finding a cosinger and responsible borrowing
Cosigning on a loan can be risky business. The cosigner presumably has a good credit score and decent income, and thus doesn’t have much to gain from cosigning, even if the primary borrower is responsible. That person, however, have a lot to lose should the borrower fail to meet all financial obligations.
Because of the inherent risks for a cosigner, it may be difficult for a borrower to find a willing party. While you can ask anyone close to you, younger people tend to ask a parent or other close family member. Krishna notes that most of the applications he sees are not from younger people, though, and you should turn to another specific family member to cosign if possible.
“We do care whether you have a spouse or nonspouse cosigner,” he says. “Spouse cosigners are viewed more favorably.”
Before you broach the subject with your potential cosigner, come prepared. Know the terms of your loan offer, and figure out how you would meet them if you successfully found a cosigner. Then, present the offer to the person you hope will sign, along with your payoff plan. Stress that you understand the gravity of the request, and provide some assurance that you’ll meet your responsibilities. Tell the person you won’t let him/her down.
Then, make sure you don’t. Make on-time payments each and every month. By doing so, you are likely to strengthen your own credit history — especially if you’re attempting to establish one from scratch.
After a few years of on-time payments, your score may be strong enough to release the cosigner.
Can I remove my cosigner from the loan in the future?
Cosigner release is not as common in the world of personal loans as it is in student loans. You can still relieve your cosigner of their duties, though, if you qualify for a new personal loan on your own and then refinance.
To improve your financial situation to a point where you qualify solo so you can release your cosigner from their obligations, make on-time payments every month. Don’t just do this for your personal loan; do it for all of your other bills and debts, too.
Work to reduce your DTI and simultaneously lower your credit utilization. Make increasing your income a primary goal, whether that be through a promotion at your primary job or by taking on a consistent and reliable side hustle.
It’s hard work, but the reward of maintaining a healthy personal relationship with your cosigner post-loan is worth it.