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.
Getting approved for a personal loan can be challenging, especially if you have less-than-perfect credit or a limited credit history. In cases like these, adding a cosigner to your loan application can improve your chances of approval and help you secure better loan terms. But before asking someone to cosign your loan, it’s important to understand what cosigning entails and how it could impact both you and the cosigner.
In this comprehensive guide I’ll explain everything you need to know about getting a cosigned loan including
- What is a cosigner and when do you need one?
- How to find someone willing to cosign your loan
- The pros and cons of cosigning
- Alternatives if you can’t find a cosigner
- FAQs about cosigned loans
Let’s dive in!
What Is a Cosigner?
A cosigner is someone who agrees to be equally responsible for repaying a loan along with the primary borrower The cosigner signs the loan agreement and legally commits to making the payments if the primary borrower fails to do so
Cosigners are usually required when the primary borrower has:
- Poor or limited credit history
- Low income
- High debt-to-income ratio
By adding the cosigner’s income, assets, and credit history to the application, it improves the chances of getting approved and can help the borrower qualify for better terms like a lower interest rate or higher loan amount.
When Do You Need a Cosigner?
Here are some of the most common situations when getting a cosigner can help with loan approval:
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You have bad credit: If your credit score is below 650, you’ll likely have trouble qualifying for a personal loan on your own. But with a cosigner that has good credit, you’re more likely to get approved and get better rates.
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You have no credit history: Young adults and others with minimal credit history often need to have an established cosigner to get approved for financing.
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You have high debt levels: If your debt-to-income ratio is over 43%, some lenders may turn you down for a personal loan. Adding a cosigner with lower debt levels can help overcome this obstacle.
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You’re self-employed: It can be harder to verify income if you’re self-employed. A cosigner with a stable income from traditional employment can help strengthen the application.
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You need a larger loan amount: Cosigners with good credit may help you qualify for a higher loan amount that you can’t get approval for on your own.
How to Find Someone Willing to Cosign Your Loan
Finding someone trustworthy and financially stable to cosign a loan with you takes some work. Start by looking at people close to you:
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Spouse: If your spouse has good credit, they may be willing to cosign the loan with you.
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Parents: Parents often cosign loans for their children, especially student loans.
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Other family members: Depending on your relationship, grandparents, siblings, aunts/uncles may be open to cosigning.
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Close friends: Your closest, most reliable friends can be options if family members decline.
Before asking potential cosigners, have details about the loan amount, terms, and repayment plan ready. Be transparent about your finances and make a strong case for why you can repay the debt responsibly. Offer to sign a contract agreeing that you’ll repay on time.
If close friends/family refuse, peer-to-peer cosigner services like Credit Strong and LoanMe can match you with a non-friend cosigner, often for a fee.
The Pros and Cons of Cosigning a Loan
Cosigning has advantages but also important risks to weigh.
Pros for the Primary Borrower
- Higher loan approval chances
- Lower interest rates
- Larger loan amounts
- Can build credit through on-time payments
Cons for the Primary Borrower
- Cosigner fees from non-friend services
- Strained relationships if payments are missed
- Cosigner may restrict access to loan funds
Pros for the Cosigner
- May strengthen a relationship/build trust
- Feeling of fulfillment by helping someone out
Cons for the Cosigner
- Legal responsibility for repaying loan if primary borrower defaults
- Missed payments hurt cosigner’s credit too
- Less borrowing power until loan is paid off
- Potentially strained relationships if forced to repay
As you can see, the risks involved for cosigners are quite burdensome. Make sure to fully explain the hazards to anyone you ask and have a backup plan if they decline.
Alternatives if You Can’t Find a Cosigner
If you have no cosigner options, all is not lost. Here are some possible alternatives:
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Apply for a secured loan – Using a valuable asset like a car as collateral improves approval chances.
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Ask your employer for a salary advance – Some employers provide one-time salary advances with repayment through payroll deductions.
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Borrow from your 401(k) – Loans against your 401(k) balance must be repaid within 5 years but typically have low interest rates.
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Use low-interest credit cards – 0% APR cards allow interest-free repayment for up to 21 months on purchases/balance transfers.
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Borrow from family/friends – Set clear repayment terms but realize strained relations can result if you default.
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Explore loan alternatives – Pawn shops, payday/title loans are options but extremely high fees/interest rates often make them predatory.
FAQs about Cosigned Loans
How much income does a cosigner need to qualify?
Most lenders don’t publicize specific income requirements for cosigners but ideally their income should be substantially higher than the monthly loan payments. Lenders want reassurance the cosigner can comfortably handle the payments if needed.
Can I get a cosigner after being denied?
Absolutely, in fact that’s a very common scenario. Simply reapply for the loan with the cosigner and their information included in the new application.
Can I get a cosigned loan with bad credit?
Yes, the whole point of having a cosigner is to overcome bad credit. Just make sure your cosigner’s credit score is 650 or higher.
Is it easier to get a loan with a cosigner?
Without question, having a cosigner makes getting approved significantly easier in most cases. Their good credit and income gives the lender confidence in the application.
How much of a loan payment does the cosigner pay?
Legally, the cosigner is on the hook for the entire loan amount if the primary borrower defaults. But typically the cosigner isn’t required to pay anything unless payments are missed.
The Bottom Line
While finding someone to cosign a loan with you can be difficult, it can also greatly increase your chances of approval if you have existing credit challenges. Just make sure your potential cosigner fully understands the hazards involved before agreeing to sign the loan.
And if you do get a loan requiring a cosigner, make absolutely certain you repay on time to avoid damaging this important relationship along with both your credit scores. In the long run, establishing a positive payment history is the key to qualifying for future loans without needing to rely on someone else’s financial reputation.
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.
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.