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Using a Cosigner to Get a Personal Loan

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Life can get expensive, whether it’s paying for a child’s wedding or unexpectedly buying a new furnace when yours breaks in the middle of winter. Personal loans can be a quick and easy way to borrow the money you need — if you have good credit — as you can get a lump sum in a variety of amounts that you can use at your discretion.

Some borrowers, however, may have trouble qualifying for a personal loan. This often happens due to a low credit score, past bankruptcies or the lack of a credit history. In these cases, one way to increase your chances of qualifying for a personal loan is to persuade a friend or family member with good credit to serve as your cosigner.

What is a cosigned loan?

When lenders assess loan applications, they are looking at applicants’ financial histories to determine how likely they are to repay what they borrow. Lenders may turn down applicants who have a poor credit score, lack a steady income or don’t have much of a credit history. To a financial institution, people with those attributes may pose too great a risk.

But a cosigner gives applicants a way around these circumstances.

A personal loan cosigner is someone who agrees to assume equal responsibility for the loan, which means that if you can’t make the payments, the cosigner must. Typically, a cosigner for a personal loan has a good credit score and and the ability to repay the loan, based on his or her income and other debt obligations.

You can benefit from a cosigner in two ways. First, a cosigner’s good credit score and financial history may help you — an otherwise unqualified borrower — get a personal loan. Secondly, a cosigner can assist you in receiving a significantly lower interest rate.

Pros and cons of a cosigned loan

Pros:

  • A cosigner can help you qualify for a personal loan or get a lower interest rate you wouldn’t otherwise get because of poor or thin credit or insufficient income. A cosigner also can increase the number of loan offers you receive, according to a spokesperson for LendingClub, an online lender.
  • A personal loan with a cosigner can provide you with much-needed cash, whether it’s to pay off high-interest debt or fund home repair.
  • If you’re determined to improve your credit, you can use a cosigned personal loan to build your credit rating by making regular, on-time payments until the loan is paid off.

Cons:

  • The account will show up on your credit report, but also on the cosigner’s. If you miss a payment, both you and your cosigner will see your credit suffer.
  • If the cosigner applies for a mortgage or other loan, the cosigned personal loan could show up on his/her credit report as a monthly obligation and lower that person’s debt-to-income ratio — even though the cosigner is not making the payments on the personal loan.

Cosigner versus coborrower

The person who agrees to apply for a personal loan can take on one of two roles in the process: cosigner or coborrower. Both roles require taking full responsibility for the loan if the you default on payments.

Coborrower: A coborrower, also called a joint applicant, acts like a partner in the transaction, accepting equal responsibility for paying off the loan and allowing his/her income and assets to be considered on the loan application. The coborrower’s name will appear on loan documents.

Coborrowers are entitled to a share of the loan’s proceeds and share in the obligation to repay the loan.

Cosigner: A cosigner’s name also appears on loan documentation, but rather than sharing ownership in the loan, the cosigner agrees to repay the loan if you cannot make the payments. The cosigner serves as a guarantor of the loan and is only liable if the applicant fails to make payments.

How to get a cosigned personal loan

Income requirements

Most lenders will look at an applicant’s work history and current employment when determining whether he/she is likely to repay the loan. While a lender may not require a minimum income, the applicant will need to demonstrate that there will be a secure income over the life of the debt.

Credit requirements

Because the personal loan market has grown more competitive, lenders offer a range of interest rates based on the amount and length of the loan and the borrower’s credit history. Most lenders only will consider good or excellent credit, although there are options for people with bad credit. Here are the best personal loan rates available now, for a variety of credit levels.

How to get the best personal loan rate

One advantage of personal loans is that they are simple financial products, which means borrowers only need to compare loans’ interest rate and fees. Personal loans are approved for a certain amount, which the borrower receives upon loan approval. The borrower then makes fixed payments at a fixed interest rate until the load is repaid.

If you want to get the best rate possible or want to get a loan without a cosigner, there are several actions you can take to improve your financial standing.

Improve your debt-to-income (DTI) ratio

Lenders use DTI to figure out what percentage of your income is spent on paying debts. It’s determined by dividing your monthly debt payments, including credit cards, vehicle loans and student loans, by your gross monthly income (income before taxes). Lenders look for a low DTI, which indicates better financial health.

Lenders often look favorably on applicants with DTIs in the 30s. For example, Wells Fargo lists on its site that a DTI of 35 percent or less shows that the borrower likely has money to save after paying bills. A DTI between 36 and 49 percent indicates that the borrower may struggle to handle unforeseen expenses, and lenders may look at other eligibility criteria for borrowers in this range, according to Wells Fargo.

A DTI of 50 percent or higher shows that most of a borrower’s income is going toward paying off debts, leaving little or no money for unexpected expenses. Lenders may be unlikely to consider applicants in this category.

If your DTI is too high, with time and financial discipline you can improve the picture. You’ll need to reduce your total monthly debt payments, which you can do by paying off loans or refinancing or consolidating loans for a lower interest rate and/or monthly payment.

Increase your credit score

According a November 2017 analysis of personal loan offers aggregated by MagnifyMoney, lenders require credit scores ranging from minimums in the mid-500s to 720. A higher credit score will typically result in a lower interest rate on a personal loan.

Here are the best ways to increase your credit score, according to credit scoring giant FICO:

  • Pay your bills on time.
  • Reduce the amount of debt you owe, which you can do by make extra payments toward your debts and curbing your spending to keep your credit card balances low.
  • Check your credit report for errors that could be hurting your score.

Shop around for rates

A number of lenders have entered the personal loan market, and it’s worthwhile to check offers online. LendingTree, our parent company, is a good place to start comparing personal loan offers.

Be sure to examine each loan’s repayment terms and rates, as they could differ — even from the same lender. Additional charges can include personal loan origination fees that can range from 0.99 to 8 percent of the amount of the loan (although some lenders don’t charge this fee), late payment fees, check processing fees and penalties for paying off the loan early.

Lenders that allow cosigned personal loans

Here are three lenders from our list of best personal loan rates that offer loans with cosigners.

Lightstream:LightStream is the online lender of SunTrust, and if offers a streamlined application process that can result in funding in one business day. Lightstream does not require an origination fee, but it does adjust its terms based on the intended use of the personal loan. The online lender rates well for its transparency with its terms, and it does not charge additional fees.

LendingClub:LendingClub offers an easy online application process that will provide you with a table of loan options based different amounts, lengths of the loans and interest rates. The lender will offer loans as high as $40,000 for 36 or 60 months, and interest rates are determined by LendingClub’s internal scoring system. Scoring is based on the applicant’s DTI ratio (it should not be above 50 percent excluding mortgage payments), a credit report with few hard inquiries, a credit score of at least 600, and evidence of some credit history. LendingClub charges an origination fee of 1.00% - 6.00% of the amount of the loan.

Note that LendingClub does not offer loans to residents of Iowa and West Virginia.

OneMain: While OneMain Financial will offer personal loans to applicants with credit scores of 600 and same-day financing, the tradeoff is high interest rates and stricter personal requirements. Applicants must have a job and verifiable income, no bankruptcy filings and some credit history. Interest rates will range between 16.05% and 35.99%, and OneMain offers personal loans up to $30,000. The lender does not offer loans for tuition or businesses expenses. OneMain does not charge an origination fee, but lenders likely will try to sell you unemployment, life or disability insurance when you apply for a loan.

Finding a cosigner

Approaching a trusted friend or relative about cosigning a personal loan can be touchy; you are asking them to risk their credit and finances for you to borrow money.

Most importantly, your cosigner should be financially stable and have enough money to repay the loan should you be unable to do so. A spokesperson for LendingClub said many borrowers asking about loans often bring up the idea of asking a close friend or family member to cosign. “Be sure your cosigner has a solid financial history and a strong credit profile,” the spokesperson said. These factors will play a significant role in the rates and offers you’ll get for a personal loan.

Even with all of those factors in place, be prepared for everyone you ask to say no. Cosigning a loan presents a significant risk that some people — no matter how much they like you — won’t be willing to take.

When it comes to repayment, it is vital that you make every monthly payment on time. Missed payments will show up on your cosigner’s credit report, which will hurt that person’s credit as well as yours. If someone trusts you enough to risk his or her good financial standing, rise to the occasion and do whatever it takes to pay off your cosigned personal loan responsibly and on time.

If you’re the one considering cosigning a loan, the Federal Trade Commission recommends you ask the creditor to notify you if the borrower misses a payment — get the agreement in writing. The FTC also encourages you to get copies of all documents pertaining to the loan and keep them for your records.

Can I remove my cosigner from the personal loan in the future?

The option to release a cosigner varies by lender. Some lenders, such as LendingClub, will not allow you to remove a cosigner from a loan at any point, while others may allow you to release a cosigner after the primary borrower has made a certain number of on-time payments. Before you commit to a loan, ask if removing a cosigner is an option and, if so, how to go about it when the time comes.

Personal loans with cosigners can greatly benefit borrowers, but it’s important to keep in mind that cosigners are putting their finances on the line to help you. Borrowers can best protect their cosigners by making sure they are vigilant about keeping a steady income, making payments — and yes, using the loan responsibly.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
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Marty Minchin is a writer at MagnifyMoney. You can email Marty here

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Top 5 Personal Loan Myths of 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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When it comes to personal loans, many Americans are more likely to turn to credit cards as a way to pay emergency bills, enjoy a dream vacation, or pay for items they can’t afford with cash.

According to Experian, existing personal loan debt was at $273 billion in the second quarter of 2018, while existing credit card debt was at $782 billion in the same period.

But it also shows personal loans with a greater year-to-year change in debt growth than credit cards. Whether personal loans are a viable option for expenses depends, apparently, on who you ask.

Awareness seems to be a key factor. When people are in the dark about financial solutions, they will draw their own conclusions, often leading to false perceptions.

What are some of the myths about personal loans?

5 things people say about personal loans

Myths about personal loans have developed over two centuries, making them hard to debunk.

Fortunately, the internet makes it easier than ever to not just raise awareness about personal loans and to clarify misconceptions, but to find the lowest interest rates and apply for loans.

Personal loans have a difficult and lengthy application process

Before the internet, borrowers had to apply for a personal loan by visiting their bank. During the days of the Morris Plan banks, they often evaluated borrowers based on character and income. This may have meant dressing in your Sunday best and arriving for a meeting with a loan officer with stacks of paperwork, pay stubs and tax returns.

Today, applying for a personal loan is easier than applying for a home equity loan or a mortgage.

You can apply easily online in just a few clicks. Many lenders will ask you to provide your Social Security number, your monthly expenses — including any outstanding debt such as mortgages, car loans, student loans and credit card debt — and your income.

Keep in mind that applying for a personal loan may require a hard credit inquiry and could lower your credit score. If you can, try to pre-qualify for a loan before you apply.

You won’t qualify for a personal loan if you don’t have excellent credit

This common misconception couldn’t be further from the truth. Personal loans are available for borrowers with a FICO Score as low as 500, but you won’t get the best rates with a rock-bottom credit score.

Most lenders look for borrowers with a credit score of 670 or higher. But a score of 800 or more will net you the best terms and interest rates.

Personal loans have lower interest rates than credit cards

Unlike the other myths explored, this one has some truth to it. It all depends on your creditworthiness.

Borrowers with a credit score of 720 or higher get personal loans at an average APR of 7.09%, according to LendingTree data, which is lower than the current 14.73% average APR for credit cards. (Disclosure: MagnifyMoney is owned by LendingTree.)

But if your credit is between 660 and 679, the average APR for a personal loan jumps to 16.72%.

It might be smarter to open a credit card with a 0% introductory APR for balance transfers and pay down as much debt as you can during that introductory period. With on-time payments, your credit score will rise and you can continuing using the same process until your high-interest debt is paid off.

Personal loans have high interest rates

“Personal loans have high interest rates” and “personal loans have lower interest rates than credit cards” might seem to be contradictory misconceptions.

In fact, they show just how much confusion there is about personal loans. Some people perceive the rates to be too high, while others assume a personal loan will offer a lower interest rate than their existing credit card debt.

There is just not enough awareness about personal loans being a good option for many people.

So what’s the truth?

If you have an excellent credit score, you could qualify for a personal loan with single-digit interest rates, which is lower than most credit cards.

Personal loans are also a better option than predatory payday loans, which can have an APR of almost 400%.

But if you own a home, a secured loan such as a home equity loan or home equity line of credit will almost certainly deliver a lower interest rate than an unsecured personal loan.

Personal loans just aren’t right for many borrowers

Many people don’t think of themselves as a good candidate for a personal loan. Maybe they feel their credit isn’t good enough or they don’t make enough money to quality.

Homeowners often consider home equity loans or HELOCs before personal loans. And, of course, the 70 million Americans carrying credit card debt month to month may not have thought about a personal loan.

But you could be a good candidate for a personal loan if you have excellent credit and need cash to consolidate credit card debt, pay medical bills or make a large purchase.

With an easy online application process, personal loans are increasingly becoming a smart choice for many borrowers.

What are your personal loan options?

In spite of the myths surrounding them, personal loans continue to grow in popularity.

In the second quarter of 2018, personal loans showed the greatest year-over-year growth than any other type of loan, according to Experian. Personal loan debt increased by 11.4%.

Borrowers looking for cash to pay off revolving credit cards or remodel their home may want to consider a personal loan. If you’re considering a personal loan, check your credit reports from all three credit bureaus and repair any errors to be sure your credit is in tip-top shape so you can qualify for a lower interest rate.

If your score isn’t where you’d like it to be, take time to pay down existing debt to improve your credit utilization ratio and raise your credit score. Avoid opening or closing accounts before applying for a personal loan since these actions could reduce your score.

As your credit score is increasing, use the MagnifyMoney personal loan marketplace to find a loan with the lowest rates and best terms for your situation. Always remember to do your research, consider all your options and make sure your finances are in order before applying for a personal loan.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dawn Allcot
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Dawn Allcot is a writer at MagnifyMoney. You can email Dawn here

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Loan Origination Fees: Should I Be Paying Them?

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If you’ve applied for a personal loan or mortgage, chances are you probably came across something called an origination fee. If you’re wondering what it’s for and whether you have to pay it, here’s what you need to know.

Understanding origination fees

An origination fee is a common charge that is added to a personal loan, student loan or mortgage. It is charged by the lender and can also be referred to as an application, processing or underwriting fee. Its purpose is to cover the hard costs of preparing documents, processing and underwriting your loan, and any third party fees that might be incurred along the way, said Ashley Luethje, a York, Neb.-based sales manager at Waterstone Mortgage.

“These fees are typically a percentage of the total amount you’re borrowing,” Luethje said. “Generally, a mortgage origination fee is around one percent, but for consumer and commercial loans, the fee can be greater and is at the discretion of the lender.”

How an origination fee can come into play

If you’re deciding between lenders, one criteria you might want to take into account is the difference in their origination fees. There are some key points to consider, depending on the type of loan you’re applying for.

Personal loan

As personal loans are typically unsecured and not backed by any collateral, you may find the highest origination fees in this category. Because these types of loans carry more risk for lenders, they may charge you anywhere between 1% to 6% of the total amount you are borrowing. Those higher fees also offset the lower amount of interest lenders like banks and credit unions will receive during the life of a personal loan. These loans tend to be extended for a shorter term and in smaller amounts than other kind of loans.

If you’re not getting charged an origination fee with your personal loan, be aware that the lender may make up for it some other way, such as charging higher interest rates, said Jacob Dayan, the Chicago, Ill.-based CEO and co-founder of Community Tax and Finance Pal.

“It’s important to note that having a good credit history will yield you a much lower origination fee,” Dayan said. “Those fees are negotiable for larger loans, but will commonly require you to put up something, such as accepting a higher Annual Percentage Rate (APR) on your loan.”

Mortgage

Mortgage origination fees — also called mortgage points — can vary drastically as they are determined by the lender, said Jason Larkins, a Scarborough, Maine-based branch manager at United Fidelity Funding. These fees are charged to cover the labor involved in the processing, underwriting and funding of a mortgage, as well as third party fees incurred in tasks such as verifying your employment.

Many lenders, such as banks, credit unions and brokerages, charge a flat origination fee. This means the fee is not based on the amount you borrow. Others could charge a 0.5% to 1% origination fee; the VA home loan program sets a cap at 1%. “However, if a borrower is paying a 1% origination fee, they are likely paying too much and can shop for a better deal,” Larkins said.

At the beginning of the mortgage application process, lenders must disclose the exact origination fee being charged in an official Loan Estimate form. Lenders may not increase the stated fee except under special circumstances, such as if you decrease your down payment or change your type of loan. However, you could negotiate it downwards depending on your credit score, and the size and duration of your requested loan.

As long as you meet certain criteria outlined in IRS Publication 530, your mortgage origination fees may also be tax deductible.

Student loans

Origination fees for federal student loans are set by the government and may vary depending on whether you have a direct subsidized, direct unsubsidized or direct plus-type loan. Those fees could range from 1.062% to 4.264%  and are deducted from the loan amount — meaning you get a smaller loan in the end but will still pay back the full amount. For example, if you were to take out a $10,000 loan with a 4% origination fee, you would only receive $9,600 but would have to pay back the entire $10,000.

The only federal student loans that didn’t charge an origination fee were the Perkins Loans for undergraduate and graduate students in financial need, but this program recently ended. While most student loans provided by private lenders such as credit unions and banks might not come with origination fees, they could cost you more in the long run by charging higher interest rates. Private student loans also don’t come with the federal protections that are standard with federal loans.

Keep in mind that loans with lower interest rates but higher fees can cost more than loans with a higher interest rate and no fees. An easy way to calculate whether your lender is giving you a good deal is to remember that 3% to 4% in fees is equivalent to a 1% higher interest rate.

Is my origination fee too high?

Origination fees are not required, so it’s at the lender’s discretion to waive or negotiate the fee, said Kris Alban, the San Diego-based executive vice president of iGrad.

“It’s always smart to ask for a discount, especially if you have a high credit score and it’s a large loan,” Alban said. “When negotiating, the lender may agree to lower or waive the origination fees if you’ll pay a higher interest rate — meaning they will still make a profit, and you can pay the fees over the length of the loan rather than up front.”

To get the best big picture outlook of whether you’re getting a good deal on your loan, make sure you’re not just comparing the origination fees but also factoring in the interest rate. For example:

  • A $10,000 loan at a 4.99% APR for five years with a 3% origination fee will cost you $11,620 over the life of the loan.
  • The same loan at 5.65% APR with a 1.5% origination fee will cost you $11,652 over the life of the loan.

“Pay attention to both the interest rate and APR,” Alban said. “If they are different, the lender is most likely factoring additional fees into the APR; any origination fee over 4% of the total loan amount is excessive.”

The bottom line

Origination fees are charged by lenders to cover the costs of processing your loan, whether you’re looking for a mortgage, personal loan or student loan. Even though lenders are subject to regulations, be cautious of anything that sounds too good to be true and remember that the absence of origination fees can translate into higher interest rates. “Take the time to read the fine print and completely understand the terms of the loan,” Luethje said.

While you should exercise your ability to price origination fees with different lenders to get you the best deal possible, remember there is no one-size-fits-all scenario. “Make the choice that best fits your needs. If an upfront origination fee hinders your ability to receive a loan but a higher interest rate is a better option, then that might be the best scenario for you as a consumer,” Luethje said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Barbara Balfour
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Barbara Balfour is a writer at MagnifyMoney. You can email Barbara here

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