Should I get a personal loan with a co-signer?

Mother and daughter looking at loan terms togetherImage: Mother and daughter looking at loan terms together

In a Nutshell

If you need a personal loan but can’t get approved, a co-signer with good credit may help. But not all lenders accept a co-signer — and if they do, it means both you and your co-signer are putting your credit and finances on the line. Before you get a loan with a co-signer, there are several alternatives worth considering, including waiting to build your own credit.
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If you’re struggling to qualify for a personal loan, a co-signer with good credit may be able to help.

You can benefit from adding a co-signer with good credit to a loan. But for the co-signer, signing onto a loan could be a big risk. They assume a lot of responsibility, and if you don’t hold up your end of the deal, their finances could take a hit.

Here are a few things to know before asking someone to co-sign for you.

What is a co-signer?

A co-signer is someone who joins you in applying for a loan. When they co-sign on a loan with you, they also take on the legal responsibility of paying back the loan if you don’t. The loan will appear on their credit reports as well as yours.

The purpose of a co-signer is to give your lender confidence that the loan will be repaid on time and in full. The lender can consider both your credit and the co-signer’s credit when making an approval decision.

And if your co-signer has good credit — you may have a greater likelihood of being approved and may even get a lower interest rate.

Who makes a good co-signer?

A co-signer can be a relative or friend, or even your spouse. A lender can’t require your spouse to co-sign unless you’re both applying for the loan. But if you’re married to somebody with better credit than you and they’re not already applying for the loan with you, then your spouse may be an ideal co-signer. Here are a few qualities to look for in a co-signer.

  • The potential co-signer should be able to afford to make the monthly loan payments if you can’t.
  • They have good or excellent credit. Across the three major consumer credit bureaus, a score 700 and above (on a scale of 300 to 850) is typically considered good.
  • They’re comfortable taking on more debt and increasing their debt-to-income ratio. More debt may hamper the co-signer’s own plans for a new loan or more credit in the future.

What to consider before getting a co-signer

Before asking someone to be a co-signer, consider some of the risks and limitations you both might face.

You’re both taking on significant financial risk

While many people go into a new loan with the best of intentions, a change in circumstances could lead to late or missed payments. Before signing on a loan with a co-signer, make sure you can afford the monthly payments.

A single late payment may not seem like a big deal, but both you and your co-signer’s credit can take a hit. And if you become unable to make loan payments, your co-signer will have to pay off the loan to prevent it from going into collections, along with any late fees or collection costs. If your co-signer can’t pay, the account can go into collections and the lender could even seek to garnish their wages.

Missed payments and collections will also have a negative effect on both your and your co-signer’s credit. That negative information may remain on both of your credit reports for seven years. All of this can have a major impact on your relationship with your co-signer.

On the flip side, making on-time payments on the loan can boost both your and your co-signer’s credit.

Not all lenders accept co-signers

While some banks, credit unions and online lenders do, be sure to check before asking someone to co-sign.

You may not be able to remove a co-signer from a personal loan

At some point, one of you may want to remove your co-signer from the loan. Ask if your lender offers a co-signer release. With this option, the lender may release your co-signer of responsibility for the loan. This may happen if you make your payments on time for a specific number of months and if your credit scores improve enough to give your lender confidence that you’ll continue to make those payments on your own.

If your lender doesn’t offer a co-signer release, refinancing or loan consolidation may be your only option for removing a co-signer. Over time, if you build a stronger credit profile and can qualify for a new loan on your own, you may be able to refinance or combine multiple loans into a new personal loan to release your co-signer.

Alternatives to getting a loan with a co-signer

If getting a loan with a co-signer isn’t the right option for you, you still have a few alternatives to consider.

Waiting while you build your credit

If you can wait to get your loan, focus on making on-time bill payments and paying down debt to help improve your credit.  If you’re able to boost your credit, you may be more likely to get approved for a loan on your own or be approved for a loan with better terms.

Getting a credit-builder loan

Like waiting to get a loan as you build your credit, considering a credit-builder loan is an option if you don’t need to get a personal loan right away. This type of loan allows you to build your credit without requiring a lender to take on risk. With a credit-builder loan, the lender doesn’t give you access to the money you’re borrowing until you pay for the loan in full. Your payments are reported to the consumer credit bureaus. At the end of the loan term (once you’ve made all the payments) you receive the money.

Borrowing less

Reducing the amount that you’re applying for could increase your odds of approval. Lenders may have more confidence in your ability to pay a smaller amount, based on your income and credit history.

Applying for a loan with collateral

You might have a better chance of being approved for a secured personal loan. This type of loan is backed by collateral, like a savings account or certificate of deposit, meaning the lender takes on less risk and you take on more. Take note: If you don’t pay back the loan, the lender may take your assets as repayment.

Bottom line

Before you decide to get a co-signer for your loan, consider the alternatives.

If none of those works for you, turning to a close family member or friend to back you up as a co-signer may be your best option for getting an unsecured loan with more-favorable terms than you’d get on your own.

Just remember that there can be serious consequences if you don’t hold up your end of the deal. Treat any loan with a co-signer with added care. By making loan payments on time, you can help build your credit — and in the future, you may find you don’t need a co-signer at all.

About the author: Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He has an MBA in finance from the University of Denver. When he’s away from the keyboard, Eric enjoys exploring the world, flying small… Read more.