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Personal loans provide relatively quick access to funds that can be directly deposited into a borrower's bank account. The money can be used for all types of financial goals, from seeing you through an emergency to consolidating debt. They're becoming an increasingly popular financial tool that has seen growth in the tens of billions of dollars in recent years.
Because personal loans are a form of unsecured debt, there's no collateral to back them up. That means your credit will play an important role when the lender is deciding whether to approve you for a loan, and what interest rate to charge. Good credit can unlock lower interest rates and more favorable loan terms, while poor credit can result in high rates—if you're approved at all. If your credit score could use some work, partnering with a cosigner might be an option worth considering.
A cosigner may be able to help you get a personal loan, but there are some pros and cons to think about before moving forward. Let's explore how it works, along with the benefits and potential drawbacks.
What Is a Personal Loan?
Before we dive into the details of getting a cosigner, let's first take a closer look at what a personal loan is. Personal loans are a type of installment loan, meaning borrowers receive funds in one lump sum and pay the loan back in fixed monthly payments over a set time period. Once the account is paid off, it's closed and you cannot borrow more money unless you're approved for a new loan. Installment credit is different from revolving credit, like credit cards, which you can use to borrow and pay off repeatedly.
Personal loans are available through a number of banks and credit unions, as well as online lending platforms. Loan amounts can vary anywhere from around $1,000 to up to $100,000, depending on the lender. The borrower's credit score, debt-to-income ratio, employment status and income all come into play as well. Generally speaking, those with a good credit score or better (670 or above) can qualify for better loan terms and lower interest rates.
How Does Using a Cosigner for a Personal Loan Work?
Bringing on a cosigner might help you qualify for personal loans with better interest rates and terms. A cosigner is someone who agrees to step in and assume financial responsibility for the loan should you fail to make your payments. It essentially provides an additional layer of security for the lender, assuming they allow cosigners (not all do). Every lender is different, but most prefer cosigners that have a credit score of at least 670. They'll also need to prove that they're financially capable of repaying the loan if it ever goes into default.
A cosigner can be a trusted friend or family member who feels comfortable taking on this responsibility. Just like the borrower, the cosigner will be expected to provide the lender with personal financial information during the application process to determine their eligibility. This could include pay stubs, bank statements, a list of current debt obligations and more.
What Are the Risks of Using a Cosigner for a Personal Loan?
Partnering with a cosigner can be an effective way to qualify for a personal loan, but it doesn't come without risk. When someone agrees to cosign your personal loan, the loan will show up on both of your credit reports.
On-time loan payments on the account can help a cosigner build credit, but any missed payments will have a significant negative effect on the primary borrower's credit as well as that of the cosigner. If the account is ultimately defaulted on, there will be a further drag on credit scores, and the potential for other financial and legal repercussions for both borrowers.
Payment history is no small thing, as it accounts for 35% of your FICO® Score☉ . And because the personal loan will figure into the cosigner's debt-to-income ratio, it could also affect any credit applications they seek going forward.
Financial repercussions aside, asking a friend or loved one to be a cosigner could complicate your personal relationship. If things don't go as planned, you could risk jeopardizing that bond. It's also worth noting that most lenders won't allow you to remove a cosigner from the account unless you're able to refinance it with a new loan that's only in your name. For these reasons, it's wise to have an open and honest conversation with a potential cosigner from the get-go. Communicate to them why you're seeking the loan, why you need their help, and your plan for making good on your payments should they agree to cosign. If you encounter trouble repaying the loan, let them know as soon as possible.
When Does It Make Sense to Use a Cosigner on a Personal Loan?
Bringing a cosigner into the equation may help improve your chances of qualifying for an affordable personal loan if you're having trouble meeting the eligibility criteria on your own or if a cosigner would help you secure a much lower interest rate. It might be wise to get a cosigner if you're encountering any of the following roadblocks:
- You have below-average credit. If you don't currently meet the credit score requirements to qualify for a personal loan, bringing in a cosigner might be a viable workaround—assuming you have reliable employment and steady income to easily afford the monthly payment.
- You don't meet the income requirements. Even with great credit, inconsistent income could hurt your chances of obtaining a personal loan. Some lenders may be hesitant to approve you if you have an inconsistent employment history or lack of cash savings. Just be sure you have a plan in place for repaying your loan if the cosigner agrees to put their name on it.
What to Do if You Don't Have a Cosigner
If you find yourself in a financial emergency and don't have enough in your savings account to see you through, a personal loan may be your only option—but not all situations are quite as urgent. If you're seeking a personal loan to cover something like a wedding or home improvement project, you might have the luxury of slowing down and taking steps to avoid a cosigner altogether. Here are some other options to consider.
Improve Your Credit Before Applying
If your credit is your biggest challenge in getting approved for a personal loan, working on improving your credit score could make all the difference. Paying your bills on time, paying down debt and keeping your balances low on your revolving accounts can all have a positive impact on your score. You could even see an instant improvement in credit scores based on your Experian report by adding your utility, cellphone and other bills to your credit file with Experian Boost®ø. These on-time payments aren't otherwise factored into your scores, and their inclusion could result in a score increase.
Shop Around With Additional Lenders
When it's time to apply for a personal loan, it's important to shop around and get a clear picture of what's out there. The first lender you find might not offer the best interest rates or loan terms. To help you better understand the rates you're likely to get, many lenders can prequalify you using only a soft credit inquiry that will not affect your credit score. From there, you can compare offers to find a personal loan that's the best match for you. Things to look at include:
- Interest rates
- Monthly payment amount
- Length of the repayment term
- Fees (including origination fees and prepayment penalties)
- Eligibility requirements
Offer Loan Collateral
As mentioned earlier, personal loans are generally unsecured. However, it may be possible to find a lender that will allow you to put up some form of collateral to secure the loan. This might be a savings account, CD or some other asset of value. Doing so could potentially lower your interest rate or lend itself to looser credit requirements, depending on the lender. Just bear in mind that those assets will be at risk should you default on the loan.
The Bottom Line
When searching for the best personal loan, bringing on a cosigner may make you a more attractive candidate—especially if you have a less-than-stellar credit score or are struggling to meet other eligibility requirements. It also involves commingling your cosigner's financial health with your own. Ultimately, partnering with a cosigner involves being realistic about your own financial health and being upfront with the person who's willing to help. When it comes time to find a loan, Experian can match you to free personalized loan offers.