If you can’t afford to make a big purchase outright and your credit is nonexistent or less than perfect, a cosigner might be able to help you get the financing you need.
A cosigner can help you meet minimum requirements while also potentially getting better rates. But your options might be limited, since not all lenders allow them.
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How does getting a loan with a cosigner work?
Getting a loan with a cosigner works by having both the borrower and the cosigner equally responsible for paying back the loan. A cosigner is someone who agrees to pay back your loan if you miss payments or default. Rather than relying on just your credit, lenders will also take your cosigner’s financial history and credit into account when reviewing your loan.
The addition of a cosigner reduces risk for lenders — as long as your cosigner has solid credit. Because a cosigner is intended to act as a guarantee against lost, lenders will review your cosigner’s finances just as thoroughly as they reviewed yours.
How does a cosigner differ from a guarantor?
A guarantor is associated with apartments or rentals where only the primary applicant is living at the residence, although it is also used with personal loans on occasion. The main difference is that a cosigner is responsible for late or missing payments as well as loan default, whereas a guarantor is only responsible if you default.
Is a cosigner different from applying jointly?
Yes, but both do put responsibility on the person who is applying with you. Joint applicants — also known as co-applicants — and cosigners are both fully liable for the loan should you default. However, a joint application implies a level of ownership by the co-applicant over the disbursed funds. A cosigner usually has little to no say in how the loan is used.
Benefits and drawbacks of applying with a cosigner
Potentially improves your chance of approval
May make you eligible for lower interest rates
If your cosigner’s credit isn’t good enough, you may still be rejected
Could affect your cosigner’s credit if you default
Is it easier to get a loan with a cosigner?
It depends. A cosigner can be effective because they minimise risk for the lender. If your cosigner doesn’t minimise risk — that is, if they have a poor credit score or a rocky financial history — they may not make the approval process any easier.
On the other hand, if your cosigner has stellar credit, they may increase the odds of you being accepted for a loan and may even be able to score you a better rate than you would’ve been offered alone.
While eligibility varies based on the lender, a few qualifications tend to be universal:
Must be 21 years of age or older
Must have an established credit history
Must demonstrate an ability to repay the loan through regular income
Must have a low debt-to-income ratio
How to apply for a loan with a cosigner
Applying with a cosigner is very similar to applying by yourself.
Compare your options. You can start by reviewing the lenders listed in the table above. Keep in mind that a lender may not accept cosigners for each of its loan types.
Prepare your financial documents. Both you and your cosigner should have the documents required by the lender close by to make the process faster. These can include bank statements and employment information.
Apply together online. If the person who’s agreed to be your cosigner is available, consider having them there with you when you apply online. This way, they can answer any specific application questions that you’re unsure of.
3 important questions to help make this a smart choice
Cosigning a loan is a big responsibility. If you don’t make your payments or default on your loan, your cosigner is on the hook for paying back what you borrowed. Before you borrow, be sure to ask some important questions about your financial situation and ability to repay the loan.
What is the loan for? Your cosigner will likely want to know why you’re taking out a loan. Financing a vacation is much different than consolidating your debt, and you’ll need to be clear with your cosigner before you apply.
How much are you borrowing? A small loan is easier to repay than a large loan. A lower amount is more attractive to a cosigner because you’re less likely to face default and if you do, they’ll be on the hook for less money.
How often will payments need to be made? Knowing how often you’ll need to pay down your debt is important. Most lenders require monthly payments and may give you the option to make additional payments at no cost. This can impact your cosigner since they’ll have to pay if you don’t, so be sure you can make regular payments.
What a cosigner means for different loan types
The type of loan you’re considering will have different implications for cosigners when you borrow. Usually, this is based on the amount you need to borrow, the terms and the loan purpose.
Personal loans. When a person cosigns with you for a personal loan, they assume liability for the loan but aren’t entitled to any of the funds. Some people may not be willing to put their name on the line for a personal loan.
Auto loans. The benefits as a cosigner for an auto loan are limited. If they’re not listed on the title, they don’t have any ownership. Being listed on the title makes the individual a joint applicant, not a cosigner.
Student loans. Cosigners are common on student loans because parents often agree to be legally responsible for their child’s loan payments. Since young students may not have established credit history, a parent cosigner can help them borrow the amount they need to pay for their education.
Mortgages. Like an auto loan, unless the cosigner is listed on the property title, they don’t own the property. If you default on your mortgage, the property is security for the loan. The cosigner isn’t transferred any type of ownership.
Business loans. For business loans — especially for riskier businesses — cosigners may be asked to provide collateral. The cosigner doesn’t hold any ownership of the business but still risks losing their collateral if you default.
At the end of the day, a cosigner provides backup in case you’re unable to pay the loan, but they don’t have any benefits from assuming that type of risk. While getting a cosigner can be a handy tool if you can’t qualify by yourself, you need to be sure you’re able to handle what you borrow before asking someone to risk their finances on your loan.
There are attractive benefits when it comes to applying for a loan with a cosigner. Finding a provider that meets your needs and allows cosigners can potentially result in easier acceptance and a better interest rate.
However, it’s important to for you and your cosigner to discuss the terms of the loan before applying. This can help you quickly narrow down your options to loans you could qualify for and what both parties should expect when making a legal agreement.
You may be able to negotiate with a lender that accepts cosigners to make your cosigner a guarantor. The process of doing so works by adding a section to the terms that identify the cosigner as liable only if you default on the loan.
Yes, a cosigner might be able to help you qualify for a loan if you have bad credit. However, make sure you’re working with a lender that accepts cosigners — not coapplicants — if your credit score is in the way of your application.
If your cosigner has bad credit, you’re out of luck — unless you can meet the credit requirements on your own. Talk to your lender before you apply — your cosigner might be able to help you meet other requirements like income or residency even if their credit score is less-than-perfect.
That’s because it makes you less of a risk to the lender, in the same way that backing your loan with collateral might.
You can research services that match borrowers with cosigners. You might also be able to consider extended family and friends of friends, though keep in mind that any late payments could affect their credit history as well as yours.
Depending on the lender, your cosigner may be able to pay on your behalf. You might want to check with the provider ahead of time if you think it could be an issue.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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