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
- 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.
- 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
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.
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.