Using a personal loan can be a convenient way to pay for some of life’s expenses, whether it’s a wedding, travel, home remodeling, or some other big-ticket item. But if your credit score is less than ideal, your debt level is too high, or your income is unstable, you may struggle to qualify for approval—or at the very least may not qualify for the most favorable interest rates.
Cosigners can often help in such situations by adding their credit profile or steady income to your application, allowing you to qualify for the loan or receive a more competitive interest rate.
While this may seem like an ideal solution, it’s important to think through the decision to use a cosigner carefully. The individual you choose will be on the line should you fail to make payments on your personal loan, which could impact their credit score and personal finances.
What is a cosigner?
A cosigner is someone who agrees to make payments on your personal loan should you fall behind for any reason. This means the cosigner is legally responsible for repaying the loan in full on your behalf if you are unable to. But this individual does not share in the proceeds from the loan.
This is different from a co-borrower, who may share in the proceeds from the loan and is equally responsible for making payments on the loan right from the start.
“If you’re considering using a co-borrower or cosigner to qualify for a loan, be sure to confirm upfront with the lender which term applies,” says Barry Rafferty, senior vice president of Achieve, a financial services company offering personal loans, home equity loans, and debt resolution. “That way, both your co-borrower or cosigner and you can work from the same page and avoid any confusion about what you’re signing up for.”
When should you use a cosigner?
There are some specific circumstances under which it may make sense to seek the assistance of a cosigner. These include when your credit score is fair to poor (300 to 669), if your income doesn’t meet lender requirements, or when you have little to no credit history established. You might also use a cosigner if you have a fairly large debt load, which may raise red flags for lenders regarding your ability to manage yet another debt payment.
Your credit is too low to qualify
While there are certainly lenders who offer bad credit loans, you will typically obtain a more favorable interest rate and terms when using a cosigner. Generally, a credit score of between 670 to 739 is what you’ll need to qualify for better interest rates, according to Experian.
“With personal loans, rates are decided primarily by credit score,” says Rafferty. “If your credit score is less than stellar, you can substantially reduce your interest rate—up to 6% in some cases—if you’re able to add a qualified cosigner to the loan.”
Unstable or low income
If you’re self-employed and have fluctuating or unreliable income, or are perhaps just starting out in your career and earn a minimal salary, you may qualify for a personal loan. It’s not unusual for lenders to have minimum income requirements (every lender’s requirements are different), and using a cosigner can help you meet such standards when you’re unable to do so on your own.
“Even if the monthly payment is within your budget, having a cosigner can help when you’re self-employed and have variable income rather than a consistent and predictable paycheck,” says Kendall Meade, a certified financial planner for SoFi.
Minimal credit history
A cosigner may also be helpful on a loan application if you’ve yet to establish a substantial credit profile of your own. Lenders like to see a fairly extensive credit history so that they can assess how responsibly you have handled debt repayment in the past.
“Usually, some degree of history is required. For example, with Achieve Personal Loans, it’s two years. Actual credit scores also figure into whether or not you can obtain a personal loan, and at what rate, but just having credit history is a separate factor,” says Rafferty.
Debt-to-income ratio is too high
Yet another significant factor that lenders consider is your current debt level, or more specifically your debt-to-income (DTI) ratio, which is a measurement or comparison of how much debt you’re responsible for paying each month versus your monthly income. To determine your debt-to-income ratio, add up all of your monthly debt payments and divide that figure by your gross monthly income.
Generally, lenders are more comfortable with a debt-to-income ratio that’s 36% or less, but the exact percentage varies by lender, and some may consider a DTI of as high as 45%.
“When using a cosigner because your debt-to-income is too high, be careful,” says Meade. “Make sure that you still choose a loan you’re able to afford. Having a cosigner may allow you to qualify for a larger loan, but you want to make sure that you will be able to afford the payments, or it may harm both your credit score and your cosigner’s if you have to default.”
How to select a cosigner
It’s important to choose a cosigner carefully. Individuals who make good cosigners include relatives, friends, or your partner. The key is selecting someone with whom you have a good relationship and feel comfortable discussing personal information.
“Because cosigners are responsible for making loan payments if the primary borrower does not, they’re taking on considerable risk. As such, it’s critical to have close and excellent communication with a cosigner so that they know your payment activity,” says Rafferty. “Given the trust that must exist between the primary borrower and the cosigner, the cosigner is often a spouse, parent, or close family member.”
When considering potential cosigners, you’ll also want to select someone who has a good credit profile and credit score (of at least 670), low debt-to-income ratio, and solid income—all of which will help your application be more successful.
”A cosigner also needs to be someone who is comfortable sharing their financial information with you, as you need to be sure that this is someone who can help your approval odds,” says Meade.
Risks of using a cosigner
Before applying for a loan with a cosigner, it’s important to consider all of the ramifications and risks. Because of the financial responsibility involved, asking someone to be a cosigner can ultimately impact your relationship with that individual. This is especially true if you miss payments on the loan and your cosigner must step in as a result.
“While a cosigner may help you in obtaining a personal loan or in getting a better interest rate—there is the possibility for strained relationships. And if you have trouble repaying, it may even result in legal action against you,” says Rafferty.
Additionally, depending on the personal loan contract you sign, you may not be able to remove a cosigner from the loan if your finances improve at some point in the future. This is an important consideration should your relationship with your cosigner change or end for any reason.
For the cosigner, there are also risks to weigh carefully—first and foremost that the primary borrower does not make payments as promised.
“What’s more of a concern is if the borrower is unable to make the payments and doesn’t inform the cosigner,” says Brian Kuhn, senior vice president and a financial advisor at Wealth Enhancement Group, a financial advisory and wealth management company. “This might come from fear they will be upset or embarrassed…but if the cosigner doesn’t know that payments aren’t being made, they could be negatively affected before they have the opportunity to resolve the situation.”
Adding a cosigner to a loan application can help you qualify, particularly when your credit score or personal income may not be enough to obtain approval on your own. However, before resorting to this approach, carefully weigh the pros and cons. And if you choose to proceed, be sure to find a cosigner with whom you have a trusting relationship and are comfortable sharing personal financial information.
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