If you want to make home repairs, consolidate debt or finance a major purchase, a personal loan with a co-signer may be the answer. A personal loan can help you get access to cash without having to put up collateral. Before you apply for a personal loan, however, check your credit history. If you have bad credit or no credit history at all, you may have difficulty qualifying for a loan.
Banks, credit unions, and other lenders want to make sure that you have the financial ability to repay a personal loan. Without that certainty, lenders may not approve your loan application. Even so, this does not mean that you have to put your plans on hold. You may be able to carry out your projects by getting a personal loan with a co-signer.
How Does Getting a Loan With a Cosigner Work
Getting a loan works when someone else agrees to become responsible when you cannot pay back the debt. A lender may recommend that you get a co-signer if you have bad credit or thin credit history. A lender expects to get its money back. So, a co-signer decreases a lender’s risk of loss from a borrower who may not pay back a loan. The lender checks a cosigner’s credit history just as thoroughly as it reviews the borrower’s credit profile.
A co-signer who has taken out loans paid back loans or have credit cards looks good to a lender. Finding this type of co-signer gives the financial lender confidence in the applicant’s ability to repay the loan. So, when someone with solid credit agrees to help you out, you stand a better chance of getting a Personal Loan with a Co-signer.
What Is a Co-signer Loan?
A Co-signer loan involves a person who agrees to pay off a loan should the primary borrower default on the debt. The co-signer also might make payments and pays late fees if the borrower misses a monthly payment during the term of the loan. A person with a well-established credit history and steady income appeals to lenders and helps borrowers qualify for loans. With a co-signer, you may qualify for different types of personal loans, such as:
Emergency Cash Loans
Due to unforeseen circumstances, you may need money quickly. But, you may believe your bad credit will prevent you from getting a loan. A cosigner emergency cash loans can help if you do not qualify for a loan on your own.
Personal Installment Loans
A personal installment loan allows you to pay back the money you borrowed in regularly scheduled installments. It can take a few months to several years to repay an installment loan. Mortgage loans and car loans are common types of personal installment loans.
With these types of secured loans, you risk losing your home or car if you default on the loan. You do not have this risk with an unsecured Personal Loan with a Co-signer. While a secured loan is backed by collateral, an unsecured loan is backed by a borrower’s or cosigner’s credit. So, cosigner personal installment loans may work best in your situation.
Pros and Cons of a Co-signer Loan
As with any financial matter, you should carefully consider the benefits and risks of a personal loan with a co-signer. A thorough discussion of the issue helps both borrower and co-signer make informed decisions.
With that in mind, let’s look at the Pros and Cons of a Personal Loan with a Co-signer:
- By having a co-signer, the primary borrower has a good chance of getting approved for a loan
- A borrower has help with repaying the loan
- The borrower and the co-signer can both build their credit
- The borrower may receive a lower interest rate on a loan if the co-signer has a good credit history
- A co-signer does a good deed for a family member or close friend
- The loan is added to both the primary borrower’s and co-signer’s credit report
- The co-signer’s debt-to-income ratio may increase
- A lender can sue the borrower and co-signer if both default on the loan.
- The co-signer may sue the borrower for failing to pay the loan.
- The lender may collect the debt from the co-signer before collecting it from the borrower.
A Personal Loan with a Co-signer can involve more risks for co-signers than primary borrowers. Because of this, the Federal Trade Commission (FTC) advises consumers to consider the liability they take on when co-signing for a loan:
“Before you say yes, think about the obligations involved and how they may affect your own finances and creditworthiness,” according to a statement posted on the FTC’s website. “When you agree to co-sign a loan, you’re taking a risk a lender won’t take.”
On a personal note, consider your relationship to the co-signer. Co-signers are usually spouses, relatives or close friends. So, keep in mind that defaulting on a loan may affect your relationship with your co-signer. You should have a personal loan agreement between friends and family regardless of if the bank owns the loans. For instance, a person wanting to start a business may ask a friend to co-sign for a personal loan. If the borrower loses the business and cannot afford to pay, the co-signer has to repay the loan. The borrower not only loses a business, but could also lose a friend.
Weighing the pros of cons helps you understand the risks involved in getting a Personal Loan with a Co-Signer.
Personal Loans With a Co-signer Can Help You Get Approved
A lender may view you as a high-risk if you have bad credit or hardly any credit. Lenders, however, have a favorable view of co-signers with a solid credit history. So, having this type of co-signer can help you in several ways, including:
Meeting Lender Requirements
While you may have less than desirable credit, your cosigner’s credit history may meet the lender’s credit requirements. A lender looks at your co-signer’s credit history of paying credit cards, loans, and other debts. Your co-signer’s proven track record of managing credit can help you get approved for a loan.
Income Covers Loan Payments
Lenders require proof of income to determine whether you can afford the monthly payments and to repay the loan. A limited income might not prevent you from getting approved for a loan. But, a co-signer with ample income to cover the debt gives you a better chance of getting the loan.
Additionally, with your co-signer’s higher income, a lender might offer you a lower interest rate on your loan. With the advantage of your co-signer’s income, you can do cosigner personal loan shopping to look for the best rate and loan terms.
What Is a Co-signer’s Responsibility for a Personal Loan?
A co-signer’s responsibility is preventing a loan default when the primary borrower no longer makes payments.
Remember that a co-signer must also pay fees that accrue because of missed or late payments. Co-signers may not control how a borrower spends the loan, but they can find out if the borrower is making payments. So, if you become a co-signer, you can:
- Ask the lender for the same documentation that the borrower receives
- Know the monthly payment amounts, due dates, and loan balance
- Check monthly loan statements to determine whether the borrower is making payments
- Contact the primary borrower to ask about missed payments
Taking care of any missing payments can help co-signers avoid a black mark on their credit report. Otherwise, the accumulating debt can cause a financial train wreck if co-signers have debt of their own.
As the Cosigner How Does it Affect Credit Scores?
A personal loan with a co-signer may or may not affect a co-signer’s credit score. A co-signer with a good credit score may see a credit rating increase by taking on additional debt. A successful loan payoff by the primary borrower further solidifies the co-signer’s credit profile.
On the other hand, co-signers may see their credit score decline if the following occurs:
- The primary borrower fails to make timely payments
- The co-signer takes on additional debt by getting another loan
- The primary borrower and co-signer both default on the loan
If someone asks you to co-sign a loan, before giving an answer, review your credit history. You may want to find out whether the extra debt will affect your credit score.
Consequences of a Loan Default
When a loan faces default, a lender may settle the outstanding balance rather than pursue legal action. A settlement may work for the primary borrower. But, the agreement might hurt a co-signer’s credit score because of the unpaid balance.
In addition, the co-signer may have to pay taxes on the canceled debt. When debt is canceled or forgiven for less than the amount owed, the Internal Revenue Service (IRS) taxes the debt.
According to the IRS,
“You must report the canceled debt on your tax return for the year the cancellation occurs.”
A lender also has the option of selling the debt to a debt collector. A co-signer may have to pay the debt collector should the primary lender refuse to make payments. The negative report stays on your credit record for seven years. Because of a drop in your credit score, you may have trouble qualifying for other loans in the future.
So, as a co-signer, you should take into consideration the possible scenarios that could affect your credit profile.
Joint Loan vs. Co-Signing – Is There a Difference?
A joint loan and co-signing can help you get approved for a loan. With both types of loans, the party with a better credit history improves the chances of getting more money and lower interest rates. But, co-borrowers benefit more from a joint loan than a co-signer benefits from a personal loan.
A joint loan involves two or more individuals applying for a loan. For example, you and your spouse may apply for a joint mortgage loan if you want to buy a house. If approved, both you and your spouse benefit from co-owning the house and have property rights.
Lenders hold co-borrowers equally responsible for repaying a joint loan. A joint loan, then, ties the co-borrowers’ credit history together. So, defaulting on a joint loan can damage the co-borrowers’ credit scores.
A co-signed loan also has two signatures attached to the debt. But, a co-signer does not benefit from the loan’s proceeds. For instance, a person may co-sign for a car but have no rights to the car. Yet, the co-signer remains liable for making payments should the car owner default on the loan. A personal loan with a co-signer benefits the primary borrower, unlike a joint loan where co-borrowers receive loan proceeds.
Who benefits from a joint or co-signed loan may not matter depending on the purpose for getting the loan. For instance, a parent may co-sign for a loan to help his or her child buy a car. The parent may view this as helping the child build credit and take on added responsibility. In addition, a friend may co-sign to help a long-time friend realize a dream of starting a business.
In these instances, individuals want to help borrowers despite the financial risks of a personal loan with a co-signer.
How Easy Is It to Get a Personal Loan With a Cosigner?
The likelihood of getting loan increases when your co-signer has a good credit profile and consistent income. Getting a personal loan with a co-signer may not be easy if people you know do not have a solid credit rating.
When reviewing a co-signer’s credit history, a lender looks at such factors as whether the individual:
- Makes timely payments on credit card bills
- Has existing loans
- Defaulted on loan(s) in the past
- Has more debt than income
Lenders want to reduce the risk of losing money. So, a lender will more than likely approve a loan with a co-signer with good credit. So, finding a co-signer who meets a lender’s financial requirements may make it easier for you to get approved for a loan.
Both borrowers and co-signers should have a serious discussion with one another before applying for a personal loan. Taking on any type of financial debt carries both financial and relational risks. So, you and your co-signer should understand the benefits and consequences of a personal loan with a co-signer.
Remember that, in most cases, the primary borrower benefits more from a personal loan than the co-signer. So, since you will receive the loan, make efforts to pay the loan on your own. Should you run into financial problems, notify the co-signer in advance. The co-signer may agree to make one or more payments to avoid any future financial trouble.
Ethan founded Goalry, Inc in Dec 2016 with the mission to build the world’s first and only Financial Goal Mall. One place to reach financial goals and comparison shop for any money matter. Taub invents the IP for the finance stores within the mall, while overseeing various aspects of the company. He also has orchestrated the company’s earned media across the finance stores: Accury®, Billry®, Budgetry®, Debtry®, Cashry®, Creditry®, Loanry®, Taxry® and Wealthry®. This includes over 1200 blogs, 400 videos, thousands of social post and publications that have been featured across the web.