If your credit needs some work, a cosigner could be the difference between your loan application being approved or denied. A cosigner agrees to take on the responsibility of repaying a loan if the primary borrower fails to do so — acting as a safety net for potential lenders.
The right cosigner will have an excellent credit score, be financially stable and be someone who you trust. Whether you’re looking for a loan or are ready to get one, this guide will help you understand the role of a cosigner and provide tips on how to find the right one for a successful loan approval.
Finding a cosigner for a loan can be a tricky endeavor. As someone who has been through the process myself, I want to share my tips for finding the ideal cosigner to help you get approved for the loan you need.
What is a Cosigner?
First, let’s start with the basics – what exactly is a cosigner? A cosigner is someone who agrees to be responsible for repaying a loan if the primary borrower fails to do so. The cosigner will sign the loan documents along with the primary borrower and their credit will be impacted by the loan as well.
Having a cosigner with good credit can help you qualify for a loan or get better loan terms if you have poor credit or limited credit history It shows the lender that someone trustworthy is vouching for you
When Do You Need a Cosigner?
Common situations when people need a cosigner include:
- Young adults with little or no credit history
- Borrowers with low credit scores
- Self-employed individuals with irregular income
- College students applying for private student loans
- Anyone who can’t meet a lender’s income requirements on their own
Getting approved for loans without a creditworthy cosigner can be very difficult or impossible in these situations.
Who Makes a Good Cosigner?
The ideal cosigner has excellent credit, a high income, and a stable financial history. Here are the specifics lenders look for:
- Credit score: 720 or higher
- Low debt-to-income ratio: No more than 36%
- Clean credit report: No late payments, bankruptcies, or other red flags
- Long credit history: 10+ years of established accounts
- Steady income: Salaried income is best
Family members like parents, grandparents, aunts/uncles often make good cosigners because they have an interest in helping you out. But you can also ask other trusted individuals like family friends, mentors, or employers (if appropriate).
How to Ask Someone to Cosign
Asking someone to cosign a loan for you is a big favor. Here are some tips on how to approach the conversation:
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Explain why you need their help. Be honest about your financial situation and why the lender requires a cosigner for approval.
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Make your case. Share why this loan is important, how it will help improve your finances.
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Offer to provide collateral. Offering to secure the loan with an asset shows you’re serious about paying it back.
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Highlight the benefits. Remind them that by responsibly paying back the loan, it will help build your credit.
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Be prepared for rejection. There’s a chance even trusted friends/family will decline so have a backup plan if they say no.
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Get approval from their spouse if married. Their spouse should be on board too since defaults could impact their finances.
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Have the loan details ready. They’ll want info like the loan amount, terms, interest rate, and monthly payments.
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Offer to sign a contract. A cosigner agreement outlines the loan details and each person’s responsibilities.
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Express your gratitude. Thank them sincerely for even considering cosigning the loan for you.
Cosigning is a big liability, so it’s key to not pressure people and accept their decision if they aren’t comfortable with the risk. Be persistent and cast a wide net if getting a cosigner is critical to get the loan approved.
Alternatives if You Can’t Get a Cosigner
If you have no cosigner options, here are some other ideas to explore:
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Apply with other lenders – See if you can qualify without a cosigner at credit unions or specialized lenders like online lenders.
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Build your credit – Take 6-12 months to build stronger credit then reapply. Get added as an authorized user on someone else’s card or take out a secured card.
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Ask for a smaller loan amount – You may qualify for a smaller personal loan without a cosigner. It’s a start to build up your borrowing track record.
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Save up and improve your income – Boosting your income may help you qualify without needing a cosigner.
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Offer collateral – Putting up an asset, like a car title, gives the lender security. This option is higher risk for you.
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Get a secured loan – Secured loans require you to put money in a savings account as collateral which is less risky.
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Borrow from people you know – Friends/family may lend informally without involving a bank. Be sure to sign a promissory note.
While getting approved solo may take more time and effort, it can help you build financial independence and not burden others. Weigh the options carefully.
Protecting Your Cosigner and Relationship
If you’re fortunate to find a willing cosigner, you’ll want to take extra steps to protect them and your relationship:
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Make payments on time each month without fail. Set up autopay if it helps. Late payments affect both your credit and will frustrate your cosigner.
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Build an emergency fund with at least 3-6 months of expenses. This provides a cushion if you face unemployment or other financial hardships.
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Avoid racking up more debt during the loan term. Too much debt amplifies the risk for your cosigner.
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Keep your cosigner informed if any issues come up. Don’t let them be caught off guard if you refinance or want to release them in the future.
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Show your gratitude through small gifts, kind gestures, or heartfelt thank you notes. Find meaningful ways to show your appreciation.
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Release them as the cosigner once able. After 1-2 years of on-time payments, lenders may allow you to remove your cosigner.
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Don’t expect them to cosign again in the future. You likely only get one chance so make the most of it.
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If the relationship goes sour, pay off the loan ASAP. Defaulting when they vouched for you will ruin the relationship.
Treating them with respect and sticking to your commitments goes a long way in maintaining trust and goodwill.
Final Thoughts
Finding an ideal cosigner isn’t always easy, but it can be necessary to qualify for key loans when your credit is less than stellar. Make sure to carefully evaluate potential candidates, approach them tactfully, and have a backup plan if you get rejected. If you do get approved, protect both your cosigner and your relationship by upholding your end of the bargain. With some work, perseverance, and luck, you may just find that perfect cosigner to help you reach your financial goals.
What Makes a Good Cosigner?
A good cosigner can significantly improve your chances of loan approval. Typically, this person will have a good credit score, steady income, job security and a low debt-to-income ratio (DTI).
A person’s debt-to-income ratio is a measurement of how much of their monthly pay is designated for loan payments. A lower DTI indicates the ability to take on additional financial responsibilities without being at risk for default.
Loan applicants can personally evaluate a potential cosigner’s credit and financial health to ensure that your lender will approve them by following these steps.
- Check their credit: Ask permission to access your potential cosigner’s credit report. Ideally, your cosigner would have “good” credit or better — generally a credit score of 670 or higher.
- Assess income stability: Learn about your cosigner’s employment history and current job stability. Review their income sources, such as employment, investments or rental income to provide insight into their ability to pay the loan if you cannot do so.
- Calculate debt-to-income ratio (DTI): Calculate their DTI by dividing their monthly payments and debt by their monthly income. A DTI below 36% is generally considered favorable.
- Consider legal implications: It is a good practice to consult with legal professionals or financial advisors if necessary to ensure all parties are fully aware of the legal implications.
Choosing the Best Cosigner for Your Loan
Choosing the best cosigner for your loan can make all the difference, especially if you face challenges due to a limited credit history or shaky finances. Here is a checklist of factors to consider when finding your potential cosigner:
- Creditworthiness: A good cosigner will have a credit history with a good credit score, typically above 670, and with no red flags on their credit check.
- Steady income: Ensure your cosigner has a stable source of income from a steady job or other investments.
- Low debt-to-income ratio (DTI): The lower the DTI, the better their financial stability.
- Trust: Choose someone you trust, commonly a family member, close friend or trusted mentor.
- Reliability: Consider their ability to make the loan payments if you cannot.
- Communication skills: Clear and transparent communication can prevent misunderstandings and establish expectations about each person’s role.
How To Find A Co-Signer
Who can be a co-signer on a personal loan?
Income: Even with fair to good credit, you might have a hard time getting approved for a personal loan if the lender doesn’t think you have adequate income to make payments. In this case, a co-signer with a higher income might help you qualify for the loan. For the most part, just about anyone can be a co-signer on a personal loan.
Do co-signers have to make payments on a loan?
While a co-signer doesn’t have to agree to make payments on a loan, they are legally responsible for making sure the loan is repaid. Co-signers take on a substantial risk, since their personal credit will take a hit if payments are late or the loan goes into default.
What is a cosigner on a student loan?
A cosigner is a secondary person who takes on financial responsibility for a loan. The loan is listed on both the borrower’s and cosigner’s credit reports. If the borrower defaults on the loan, the cosigner becomes responsible for payment. Cosigners are required for most private student loans.
Can you get a personal loan if you can’t find a co-signer?
If you can’t find a co-signer and you’re unable to get a personal loan another way, you might be able to get a secured personal loan. Some personal lenders accept something valuable as collateral, such as a car. However, if you’re unable to make payments, the lender can then decide to repossess your vehicle.