What to do when you can’t get a co-signer

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When interviewing for my first real job, I hesitated at a question posed by my prospective employer. The question was: “Do you have reliable transportation to get to work?” I responded “yes” even though I didn’t, figuring I could get a loan and buy a car prior to my starting date.

I got the job offer, but the borrowing process didn’t go as planned. In my zeal to avoid debt in college, I had turned down credit card offers. As a result, I didn’t have any credit history and couldn’t qualify for a loan on my own.Only after my dad consented to be a co-signer did the bank approve my loan request. Still, I wonder what would have happened if I hadn’t had an agreeable parent with good credit scores.

You may find yourself in a similar situation. Perhaps you need a co-signer to borrow money for your first credit card, apartment or private student loan. But what can you do if you can’t find a co-signer? Consider these three approaches.

1. Get a loan from a nontraditional source

If you can’t get a loan from your bank or credit union, don’t fret — there are other ways to borrow money.

Jim Wang, personal finance writer at Wallet Hacks, suggests the possibility of arranging a private loan with a friend, family member or anyone who’s willing to loan money to you. He says this process may allow you to borrow money according to a more favorable arrangement, rather than a bank’s potentially stricter terms and higher interest rates.

For example, one of Wang’s friends borrowed money from a family member to attend graduate school. Though the family member didn’t require a written agreement, his friend issued a promissory note and made monthly loan payments through ACH transfers (electronic transfers from the borrower’s bank account to the lender’s bank account).

Wang says borrowing for predictable expenses, such as tuition, may be especially suitable for this type of loan. But he cautions that you may feel uncomfortable in interactions with your lender, especially if it’s a friend or family member, in the event you’re unable to make loan payments. In addition, it’s important to keep in mind that borrowing from a loved one likely won’t help build your credit, as he or she probably won’t report your payments to the credit bureaus.

2. Build your own credit

Even if you arrange a loan through a friend or family member, Jeff Rose, Certified Financial Planner™ and author of GoodFinancialCents.com, recommends taking action to build your credit through traditional means so you can avoid this in the future.

If you’re looking to build your credit, personal finance writer Chonce Maddox suggests getting a secured credit card or small installment loan from a lender who reports to at least one of the three credit reporting bureaus. With a secured credit card, you typically make a cash deposit to serve as collateral for the credit card issuer. Your credit limit is typically equal to or a percentage of your deposit.

Maddox explains that she began the process of building credit by financing a furniture purchase through an installment loan. Due to interest charges, the furniture cost almost twice as much through this arrangement. But in this case, Maddox believes “it was worth the sacrifice to build a good credit score so I wouldn’t have to depend on a co-signer.”

Your situation may be different, so be sure to consider various ways of building credit before agreeing to pay high interest rates.

Generally, companies that provide secured cards and installment loans report your credit activity to one or more of the three major credit reporting agencies, Maddox says. But check with your lender to make sure this activity is reported before deciding to proceed.

3. Look at alternative solutions

What should you do if the loan offers you receive don’t suit your budget or you need to move quickly? Consider different ways to achieve your goals.

For example, financial journalist Amy Fontinelle proposes becoming a roommate or subtenant as an alternative to getting a co-signer for an apartment lease. She explains that you may be able to avoid a credit check if you’re not responsible for paying the rent directly to the landlord, though you may be asked to prove that you can make the payments.

If you’re looking for an auto loan, Rob Drury, executive director of the Association of Christian Financial Advisors, suggests that financing through franchise dealerships associated with major automobile manufacturers is often the best choice.

“These stores typically have dozens of banks, credit unions and retail finance companies feverishly competing to offer financing to buyers in the process of closing a car purchase,” Drury says. “It’s usually advisable for the buyer to shop and secure financing before going to the dealership, then allow the dealership to offer what often ends up to be even better financing terms. If the buyer has poor or little credit, the dealership will almost always offer the best, and often the only, financing alternatives.”

Bottom line

If your parents can’t co-sign for you, explore alternatives that can help you achieve your goals. During this time, consider starting to build your credit history so you can eventually eliminate your need for a co-signer.