Getting approved for a personal loan can be difficult, particularly if you have less-than-perfect credit. In some cases, your only option might be to apply for a personal loan with a cosigner, a creditworthy person who agrees to pay your loan if you cannot. That’s a significant commitment, so you’ll want to know exactly how it works before you approach a friend or family member to cosign your loan application. This guide explains how to navigate that.
Key Takeaways
- A cosigner is legally responsible if the primary borrower cannot repay the loan.
- A cosigner can help when the borrower has limited credit history or a lower credit score.
- The ideal cosigner has good credit, steady income, and a stable, trusting relationship with the borrower.
What is a Personal Loan with a Cosigner?
A cosigner is someone who signs the loan application with the primary applicant. When that happens, the cosigner accepts equal responsibility for repayment. The payment history, including any late payments, will then show up on the credit reports of the primary borrower and the cosigner.
How a Cosigner Helps You Get Approved
A cosigner is someone with more established credit and usually a higher credit score than the primary borrower. This is important because it minimizes the risk the lender takes when lending money to a borrower with limited or less-than-perfect credit. In some cases, a cosigner may help a borrower qualify for a loan or different loan terms, depending on the lender’s underwriting criteria.
The Role of the Cosigner vs. Primary Borrower
This is an important distinction. Both the primary borrower and the cosigner are responsible for repayment of the loan, but only the primary borrower receives the funds. Ideally, the cosigner only steps in if the borrower falls behind on payments, but they’re also subject to legal action if the loan defaults. That’s something they should be aware of before agreeing to cosign.
Who Needs a Cosigner for a Personal Loan?
Not everyone needs a cosigner. For some borrowers, it is the most realistic path to approval. Here are a few reasons why that might apply to you:
- Limited or No Credit History. Lenders rely on your track record to gauge risk. If you have a limited credit history, they may not have enough information to assess your creditworthiness. A cosigner with an established history can help fill the gap.
- Lower Credit Score. A score below a lender’s threshold can mean denial or a high rate. A cosigner with good credit, generally a FICO score of 670 or higher, can offset that.
- Seeking Better Loan Terms. Even borrowers who could qualify on their own sometimes add a cosigner for a lower rate, higher amount, or longer term. This is possible because some lenders base the offer on the stronger credit profile or combined income.
Benefits of Using a Cosigner
Increased Approval Odds
In some situations, a cosigner may strengthen a loan application if the cosigner has a higher credit score or more established credit history.
Potentially Lower Interest Rates or Larger Loan Amounts
Depending on the lender and the overall application, a cosigner’s credit profile may improve loan eligibility and available loan terms.
Opportunity to Build Credit for the Primary Borrower
Credit reports are built on payment data received from banks and lenders. For loans reported to credit bureaus, on-time payments may contribute positively to a borrower’s credit history.
Personal Loan Cosigner Risks
The risks of cosigning fall largely on the cosigner. If you’re planning on asking someone to do this for you, make sure they are aware of these risks before they cosign the loan.
Full Legal Responsibility for Repayment
This is the big one. If you do not repay your loan, the cosigner will become responsible for it. .If payments stop and the loan goes into default, both the borrower and any cosigner may be responsible for the debt. The lender may pursue collection efforts and other legal remedies permitted by applicable law.
Impact on Their Credit Score
The loan remains on the cosigner’s credit report, so late or missed payments damage their score along with yours.
Affects Their Own Debt-to-Income Ratio
The debt-to-income ratio (DTI) compares the amount you owe to the amount you earn. Banks and lenders use this ratio to help determine creditworthiness. Because the loan appears on the cosigner’s credit report, it may affect their DTI.
Potential Strain on Relationships
Parents, friends, and other family members are the most likely candidates to become cosigners. Missing payments or defaulting on your loan can affect those relationships.
Cosigner vs. Co-borrower: What’s the Difference?
These two terms are often confused, but the roles are very different.
Co-borrower: Shared Responsibility and Access to Funds
A co-borrower, or joint applicant, shares equal ownership. Both parties can use the money, and both repay it. Lenders weigh both applicants’ credit, income, and DTI. Couples financing a shared goal often borrow this way.
Cosigner: Contingent Liability, No Access to Funds
A cosigner carries the same repayment responsibility but has no right to the money. Although the cosigner does not receive the loan proceeds, they remain legally responsible for repayment under the terms of the loan agreement. A co-borrower shares the benefit and the burden; a cosigner shares only the burden.
How to Find and Ask a Cosigner
Ideal Cosigner Qualifications
The right cosigner strengthens your application. Look for someone with:
- Strong credit. A good-to-excellent score, typically 670 or higher, gives the lender confidence and can improve your terms.
- Stable income. Steady, verifiable income shows that the cosigner could cover payments if needed.
Open and Honest Communication
Cosigning is a serious commitment. Explain why you need a cosigner, how much you will borrow, and your repayment plan, and make sure they understand the risks before agreeing.
The Application Process with a Cosigner
Gathering Necessary Documentation with a Cosigner
Both parties will need government-issued ID, proof of income such as pay stubs or tax returns, and proof of address. These are standard documents for any lender, but you should still ask ahead of time if there are additional documentation requirements.
What Lenders Look For in a Cosigner
Lenders evaluate a cosigner much like a borrower, reviewing credit score, income, debts, and employment to confirm they could realistically repay if the borrower cannot. You may want to ask to see your cosigner’s credit score before applying to make sure they qualify.
Checking Rates and Terms
Compare rates and terms first. Many lenders let you check potential offers with a soft credit inquiry that does not affect either party’s score. A hard inquiry, with its small temporary dip, comes only when you formally apply. Ask your loan officer what this means for you.
Can a Cosigner Be Released from a Loan?
Yes. Release is possible. A cosigner need not stay on the loan for its full term. There are two common ways to remove one.
- Refinancing Options: The most reliable route is for the borrower to refinance, replacing the original loan with a new one in their name only. This frees the cosigner and, if their credit has improved, may lower the rate for the primary borrower.
- Lender Policies for Cosigner Release: Some lenders offer a formal cosigner release after a set number of consecutive on-time payments, often 12 to 36, once the borrower can clearly carry the loan alone. Not all offer it, so ask before you sign.
Availability of cosigner release depends on the lender and loan agreement. Borrowers should review loan documents and discuss available options with their lender.
Key Considerations Before Getting a Cosigned Loan
Communication is Key
The healthiest arrangements rest on ongoing, honest communication. Keep your cosigner informed and reach out early if you expect trouble, rather than letting them find a missed payment on their credit report. If you accidentally miss a payment, let them know before you get an angry phone call that could damage your personal relationship.
Understanding Long-Term Commitment
A cosigned loan can last for years. Both parties should be comfortable with that timeline and confident that the payments fit the budget for the full duration. Ask about cosigner opt-out clauses in the agreement to give your cosigner an early way out if they want it.
Talk Through Your Options with 1st Franklin Financial
At 1st Franklin Financial, your credit score is only one part of your story. We have helped families do life for more than 80 years, getting to know each customer at their local branch. If you are weighing a personal loan with a cosigner, reach out to your neighborhood branch or start the application process online to learn about your options.
