Adding a cosigner to your personal loan application could significantly increase your chances of approval, especially if your cosigner has a strong credit history. A cosigner could also help you qualify for a lower interest rate and larger total loan amount.
However, a personal loan with a cosigner is a little more complicated to find and apply for than a typical personal loan. Read on to learn more about getting a personal loan with a cosigner.
What is a cosigner?
A cosigner on a personal loan is someone who shares the legal responsibility for repaying the loan, but does not have access to the loan funds. If the primary borrower defaults, the cosigner must take over the payments. If both parties fail to make payments, their credit scores could be negatively affected. Additionally, continued missed payments can lead to legal action from the lending company.
During the application process, the cosigner’s credit is checked with a hard credit pull. The cosigner must also provide other information, including proof of identity (for example, a valid government-issued photo ID), Social Security number, proof of address, and proof of income.
Note that a cosigner is not the same thing as a co-borrower. A co-borrower shares the financial responsibility for repaying the loan and also has access to the funds. This arrangement is also known as a joint loan.
How to get a personal loan with cosigner
Find a cosigner and talk about the specifics of the loan
To find a cosigner, look for people who trust you, such as family or close friends. Keep in mind, however, that this person is taking on a major financial obligation. If you miss payments, your relationship with this person could be negatively affected.
Once you find a willing cosigner with a strong credit profile, discuss the potential loan amount and terms with him or her to ensure mutual agreement on what is and is not acceptable. You should also talk to your cosigner about what might happen if you are unable to make your loan payments. Make sure your cosigner fully understands the financial commitment involved in cosigning a loan.
Also, keep in mind that while some personal lenders allow the removal of cosigners after a set period of time, many do not allow it at all. To remove a cosigner, you may need to refinance your personal loan as an individual borrower.
Check your credit report and debt-to-income (DTI) ratio
Before applying for a personal loan, find out where you stand in terms of eligibility. Many lenders require a minimum credit score of 580, while others have more stringent requirements. You can check your credit report once a week for free with the three major credit bureaus (Equifax, Transunion, and Experian). Be sure to check both your credit score and your cosigner’s credit score.
Lenders also consider your debt-to-income (DTI) ratio, which tells you what percentage of your monthly income goes toward paying off debt such as bills or credit cards. Most lenders prefer a DTI of 40% or less. Calculate your DTI using Money’s debt-to-income ratio guide.
Shop around for the best personal loan rates
Compare personal loan rates from various reputable lenders, including national banks, credit unions, and online lenders such as digital banks and peer-to-peer lenders. To find out if a lender accepts cosigners, check the company’s FAQ page online or contact customer service.
When evaluating loan options, consider the initial annual percentage rate (APR), but also look at repayment terms, loan fees and financing times. Our guide to the best personal loans can help you get started.
Keep in mind that there are two types of personal loans: secured and unsecured. Secured loans require collateral in the form of valuable personal property, such as a house, car, stocks or bonds, while unsecured loans do not. Additionally, secured loans often have lower rates, but the risk of losing personal property may outweigh the benefits for some borrowers.
Prequalify for a personal loan with a cosigner
When you apply for prequalification with a lender, you receive potential loan rates and terms without undergoing a rigorous credit check. This allows you to compare rates between different lenders without impacting your credit score.
However, most online loan applications are designed for individual borrowers, so you may not be able to enter your cosigner’s information. To get a prequalified rate that includes cosigner details, you may need to contact a loan company representative directly.
Apply for a personal loan with a cosigner
Choose the best pre-qualified rate for you and formally apply to that lender. Make sure you have all the necessary documents for both parties, including government-issued photo IDs, proof of income, proof of address, and Social Security numbers. Lenders may also request statements from checking and savings accounts.
A formal application makes a strong credit inquiry for you and your cosigner, so expect a slight drop in your credit scores as a result.
Review the loan agreement and accept the offer
When evaluating loan terms, be sure to look at:
- Annual Percentage Rate (APR) – The interest you will pay on the loan, including the interest rate and any associated fees.
- Commissions – Find out if you are charged an origination fee or a loan processing fee.
- Fixed interest rate or variable interest rate – A fixed interest rate will not change over the life of the loan, while a variable interest rate may increase or decrease.
- Financing time – Some financial institutions offer same-day or next-business-day financing, while others may take up to a week to disburse funds.
- Penalties for delays – Find out how much the creditor charges for late payments.
- Loan amount – The total loan amount should reflect any fees.
- Loan duration – The longer the repayment period, the more interest you will pay overall. However, a shorter loan term results in higher monthly payments.
- Prepayment penalty – Some loan companies charge a fee if you pay off the loan before the end of the loan period.
- Refund Terms – Payments can be monthly or weekly. Additionally, some lenders offer a discount for automatic deductions from your bank account (also known as automatic payments).
If any of the terms seem unacceptable to you, please consult a customer service representative. Remember that you are under no obligation to accept a loan offer.
Get financing and start repaying
Depending on the personal loan company, you may receive funding within 24 hours of loan approval. However, some lenders may take up to a week to disburse the funds.
Payments typically begin approximately 30 days after you receive your loan proceeds. Review your repayment schedule to ensure it aligns with your personal financial goals: Some lenders let you choose the day your monthly or weekly payments are made.
Pros and cons of a personal loan with a cosigner
- Improve your chances of getting a loan
- Potential for a better interest rate and lower monthly payments
- Increase your credit score by making consistent, timely payments
- It could damage your relationship with your cosigner if you don’t make your payments
- The cosigner’s access to subsequent credit or loans may be negatively affected if the debt-to-income ratio becomes too high
- Narrower selection of lenders, as not all personal loan companies accept cosigners
How to Get a Personal Loan with a Cosigner Frequently Asked Questions
Why should a borrower get a cosigner on a loan?
A borrower may opt for a cosigner on a loan when their credit score is not strong enough to secure a personal loan. Most borrowers who add a cosigner choose someone with a solid financial history, including good credit and a low debt-to-income (DTI) ratio.
Where can I get a personal loan?
You can get a personal loan from a national bank, credit union, online bank, or peer-to-peer (P2P) lender. Personal loans are available online, by phone, or in person at brick-and-mortar branches of banks or credit unions.
What is the correct definition of a cosigner on a loan?
The correct definition of a cosigner on a loan is a person who has equal responsibility for repaying the loan but does not have access to the loan funds.
What is the average personal loan interest rate?
The average personal loan interest rate is 11.87% for a 24-month loan. This information is provided by the Federal Reserve and is accurate as of April 10, 2024.
Where can I get a personal loan with bad credit?
You can get a bad credit personal loan from personal loan companies that specialize in bad credit loans. However, poor interest rates and loan terms are considerably less favorable than those offered to borrowers with good to excellent credit.