Personal Loan With a Cosigner
Whether you’re planning to take on a personal loan for life events, debt consolidation, home projects, or anything else, a good cosigner can help you qualify for more at a better rate. Here we’ll cover the ins and outs of having a cosigner and whether it makes sense for you.
What We’ll Cover
- What is a cosigner?
- How much will it approve my ability to qualify?
- Pros and cons of having a cosigner
- The difference between a co-borrower and cosigner
- How to apply
What is a Personal Loan With a Cosigner?
A cosigner can be a relative, friend, or any person willing to take on the responsibility of a loan with the borrower. When considering a personal loan, a cosigner with a solid credit score can boost your loan amount and improve your interest rate. This can be especially helpful if you have bad credit. And even if it’s decent, a good cosigner can still help improve things from the lender’s perspective.
How Much Will it Improve My Ability to Qualify?
A qualified cosigner can improve both the personal loan amount and the interest rate for the borrower. The reason is that a lender will be considering both parties’ debt-to-income ratios.
As an example, if the bank evaluates that you qualify for a personal loan of $6,000 on your own, a qualified cosigner could help you increase the loan amount to $20,000 based on your combined ratio and credit scores.
If your credit is below 600, it will be difficult to be approved for a personal loan whatsoever, and a cosigner may make the difference of whether you qualify.
Pros and Cons of Having a Cosigner
So why have a personal loan with a cosigner?
As far as the personal loan is concerned, there isn’t much of a downside for the borrower. The risk for the cosigner, however, is definitely the biggest factor to consider. Besides that, the relationship could be strained if the loan defaults or if you fall behind on your payments.
|Borrower will get a better rate and loan amount with a cosigner.||If the borrower defaults, the cosigner will be fully responsible for the loan.|
|Cosigners can make all the difference in whether you get approved for the loan you need, especially for low credit borrowers.||Having a cosigner may make it more difficult for that person to take out a loan if they need one themselves.|
|Cosigners help minimize risk for you and the lender.||There may be tax consequences for part of the loan if it's settled.|
|Both borrower and cosigner can increase their credit scores as payments are made consistently.||If the loan defaults, the cosigner will be sued first.|
Arguably, more of the risk falls on the cosigner, not the borrower. As such, it’s prudent to have a thoughtful and honest conversation about your capabilities with the person you’ll ask.
The Difference Between a Co-Borrower and a Cosigner
Both cosigners and co-borrowers will need to qualify, and both are responsible if the primary struggles to make payments. The biggest difference is that a co-borrower has ownership in the loan, not just the responsibility to step in when things go sideways. If co-borrowers want to improve their shared loan terms, they may still elect to use a cosigner.
For example, if a husband and wife want to remodel a bathroom, they may take out a loan together as co-borrowers. If the husband has great credit and the wife has poor credit, they may not qualify for as much as they could if they both had a good score. That being said, the lender will consider their shared debt-to-income ratio as well as their scores to determine their loan amount.
Keeping this example, the couple may choose to have a cosigner in order to increase the loan amount and improve their APR. If they both had great credit, they may have been able to qualify for what they wanted without one, but having one can make it possible for them to acquire all the funds they need.
How to Apply for a Personal Loan With a Cosigner
As you consider a cosigner, take stock of what you’ll need in order to be in the best position to qualify. You should first compare products from a few banks and alternative online lenders to find the best rate possible.
You can use a loan calculator to help decide how much you’ll need and what your payments may look like.
As you do that, collect all of the documentation you need to get pre-approved for a loan.
Application Checklist for a Personal Loan With a Cosigner
- Credit history and score
- Government-issued ID
- Proof of residence
- Employment history
- Employment documentation including
- pay stubs
- bank statements
- proof of employment and W-2 (or 1099 if either party is self-employed)
Note: The cosigner will also need to provide this documentation.
Here are some FAQs to help you decide if a personal loan with a cosigner is a right decision for your situation.
Q: What kind of credit score does a cosigner need to have?
A: Most lenders want to see a score above 650, but this varies by lender.
Q: Can I be sued by my cosigner?
A: If you default on your loan, the cosigner is responsible. They may have the ability to take you to court, but the odds are stacked against them. Any breach of contract could be a reason for them to sue, but they cannot win a case strictly because you default.
Q: Can a cosigner ever get out of the loan?
A: Depending on the loan agreement, they can sometimes be released from the loan. It may be important for them to do so once they feel like they have helped the borrower secure the loan they need. A record of consistent, on-time payments is the main factor banks consider before they are willing to release a cosigner.
Cosigning can be a touchy subject when it comes to a conversation with a friend or relative. Much of their decision will be based on the risk associated with sharing the responsibility of the loan without benefiting from it directly.
Having a cosigner is an excellent way to secure additional funds at a better rate and terms than you would have earned alone. Just be sure you are both on the same page before you sign.