A personal loan with a cosigner is a type of loan where someone borrows money with the help of another person. This person, referred to as a cosigner, agrees to repay the loan if the primary borrower cannot. This type of loan can be a lifeline for those with a bad credit history, in order to secure a loan on their own.
Understanding a personal loan with a cosigner is crucial in today’s financial landscape. With consumer credit, including personal loans, increasing at an annual rate of 12.3% in the first quarter of 2023¹, it’s clear that more and more people are turning to these financial tools.
Whether you’re the borrower or the cosigner, knowing the ins and outs of these loans can help you make informed decisions and avoid potential pitfalls. Are cosigned loans the best personal loans for you? Find out here!
Important Information for Primary Borrowers
Borrowers thinking about asking a cosigner to help them get a personal loan should be aware of the following considerations:
- Adding a co signer could help you get approved for higher loan amounts and/or lower interest rates. Many banks and lenders may have a minimum credit score requirement, so a cosigner can help if you have a low score.
- When deciding on a co signer, make sure you only consider people who you know have a excellent credit and a stable financial history.
- Making on-time payments on your loan is essential. Submitting just one late payment could significantly harm the credit score of you and your co signer significantly.
Important Information for Prospective Co Signers
If you are thinking about becoming a co signer on someone’s loan, it’s crucial to understand the following about co signed financing:
- Your credit score and financial history will be affected if the primary borrower with the co signed loan misses payments or defaults on the loan.
- You are responsible for paying back the full remaining loan balance if the primary borrower defaults on the co borrowed loan.
- You do not have access to the approved loan funds.
How Do Personal Loans With a Co Signer Work?
Loans with a cosigner are a type of loan that uses a third party, the cosigner, to sign onto the loan agreement along with the primary borrower. Loans are cosigned to ensure that if the primary borrower cannot repay the loan there is still another person responsible for paying back the balance.
Typically, the best personal loans that allow co signers do not come with prepayment penalties, this type of charge is usually reserved for fast cash loan options like payday loans or cash advance loans. However, delinquent borrowers will almost always be charged a late fee, no matter what loan type they have.
The Role of Co Signers
A cosigner is a trusted person in a borrower’s life who is willing to help them get a better deal on a loan. The co signer, backed up by their own creditworthiness, will sign onto a borrower’s loan contract and act as a safety net when the primary borrower doesn’t meet the minimum credit score requirements.
If the borrower keeps up with their payments and pays back their co signed personal loan on schedule, there is essentially no action required on the part of the cosigner. However, if the borrower misses a certain amount of loan payments or completely defaults on their loan, the cosigner is legally responsible for paying back the remaining loan balance.
How Does Being a Cosigner Work?
The role of a cosigner extends beyond just being a backup for repayment. Their credit history is also taken into account when the lender is assessing the loan application. A cosigner with a strong credit history can help the borrower secure a loan and possibly even negotiate better loan terms or a lower interest rate or APR.
It’s important to note that cosigning a loan may also impact the cosigner’s credit. If the original borrower misses payments or defaults on the loan, it could negatively affect the cosigner’s credit score. Therefore, it’s crucial for a cosigner to understand these things before agreeing to cosign a loan.
What Types of Lenders Offer Cosigned Loans?
Some lenders who typically allow their borrowers to use cosigners for their financing options are:
- Private lenders
- Online lenders
- Credit unions
While major banks used to commonly allow cosigners, it is now very rare. And so a co signed loan may not be possible with a bank.
Why Do Loan Some Companies Allow Cosigners?
A cosigner essentially lessens the financial risk lenders take on by lending to borrowers with no credit history or a bad credit history. For example, say you wanted to apply for a personal loan but were new to finances, and therefore had little established credit. On your own, a loan company may be apprehensive to lend you money because you don’t have an established history of making on time payments, successfully paying off personal debt, etc.
Adding a cosigner for financing would help reassure lenders that someone with a strong financial history is ultimately responsible for paying off the loan. Therefore, these lenders may be more willing to offer you loan details that they would typically only offer a consumer with more established credit.
What Types of Loans Allow a Cosigner?
Personal loans are used to pay for financial emergencies or personal expenses. The best personal loans for bad credit borrowers will allow cosigners. You can find personal loans as online loans or in-person.
These loans are used to pay for higher education expenses, including tuition, room/board, etc. Most student loans allow cosigners.
These loans are used to purchase a vehicle. Most auto loans allow cosigners.
Home Improvement Loans
These loans are used for home repair, improvements, renovations, etc. Some home improvement loans allow cosigners.
Co Signer vs. Co Borrower
A co signer is someone who signs a loan contract along with the original borrower. In cases like this, the original borrower receives the entirety of the approved loan proceeds. Co signers usually do not have access to, or receive any compensation for the funds they helped secure. A loan with a co borrower essentially has two original borrowers; meaning more than one person has access to the approved loan money. Both borrowers are responsible for repaying the loan funds. A co borrower also receives the loan money, whereas the co signer would not.
Cosigned Personal Loan vs. Signature Loan
A signature loan is essentially another term for an unsecured loan. When a loan is unsecured, the lender will base approval heavily on the creditworthiness of the applicant. By bringing on a cosigner, bad credit borrowers can benefit from the financial history of someone else, possibly allowing them to get approved for a higher loan amount or lower interest rates.
Why Get Personal Loans With Co Signers?
If you’ve come across some unexpected personal expenses you need to take care of quickly, you may not have time to thoroughly research personal loans and negotiate personal loan offers on your own. Thankfully, asking a cosigner to sign your personal loan contract with you can help you secure an affordable loan in a reasonable amount of time.
Not only can adding a cosigner increase a borrower’s approval odds for a personal loan, they can also come with additional benefits including:
Bad Credit History May Not Disqualify You From Personal Loans
The best personal loans with a cosigner can be beneficial for borrowers who haven’t had time to build their credit history or have imperfect credit scores. Having a cosigner with a good credit score can increase the chances of loan approval and potentially secure better loan terms.
Higher Loan Amount With Your Personal Loans
When lenders have the security of knowing that someone with ideal credit is backing up a loan, they are often more willing to approve higher loan amounts.
Lower or More Affordable Interest Rates With Personal Loans
Cosigners with a strong credit history may also help secure lower interest rates for the primary borrower. These lowered rates can make their loan significantly more affordable and manageable to successfully repay. Affordability is essential when looking to pay for personal emergencies.
Possibility To Build Credit With a Personal Loan
Many lenders report to major credit bureaus regarding the payment history on a personal loan of their customers. By consistently making on-time payments with your personal loan and eventually paying off your balance, you may see an increase in your credit score the next time you request a report.
Potential Risks for Personal Loans With Co Signers
The primary risk of cosigner loans is for the cosigner. If the borrower defaults, the cosigner is responsible for repaying the loan.
Additional risks include:
- Potential Credit Damage: If the borrower misses payments or defaults, it can negatively impact the cosigner’s personal credit score.
- Financial Responsibility: The cosigner is legally obligated to repay the loan if the borrower cannot, which could potentially strain their own finances.
- Relationship Strain: If the borrower fails to repay the loan, it could strain the relationship between the borrower and the cosigner, especially if the cosigner is a close friend or family member.
Who Qualifies for a Personal Loan With a Co Signer?
Using a co signer is typically a choice, therefore there really isn’t any criteria borrowers must meet in order to qualify for using one. However, the co signer you choose will heavily influence your loan as a borrower and there are risks. So, it’s important to make sure this person is qualified and willing to back up your loan.
While anyone can apply for a cosigned personal loans, the approval isn’t a guarantee. It’s a process that involves both the borrower and the cosigner. Each party must fill out paperwork, providing personal and financial information. Lenders perform credit checks on both parties, looking at their personal credit history, income, and debt-to-income ratio.
Having a cosigner with a good credit score can significantly increase the chances of approval. But remember, it’s not just about getting the loan. The cosigner’s strong credit can also help secure better loan terms, such as lower interest rates and higher loan amounts. You can also try to improve your credit score to get the best financing options from lenders.
Finding the Right Kind of Cosigners
Most people turn to close friends or family members, like a parent, when they need a cosigner. It’s not just about finding someone willing to sign the loan with you, but also about finding someone who can positively influence the loan terms.
The ideal cosigner should have the following attributes:
- An excellent credit score
- Established payment history
- Stability with personal finance
- Capacity for repaying the loan should the primary borrower become unable to do so
Remember, adding a cosigner to your loan isn’t just a formality. They’re your safety net in the eyes of the lender, and their financial health can directly impact your loan terms. So, choose wisely and always remember to:
- Make cosigned loan payments on time to avoid fees and negative impact on your credit
- During the approval process, make sure your monthly payments are affordable
- Choose a cosigner with an ideal credit report to get the best possible deal
- Think about your loan amount and accept only what you need
Negotiating a Cosigner Loan
When it comes to a cosigner loan, the negotiation of terms is a crucial step. This includes the interest rate, repayment schedule, and potentially even the loan amount. During the application process, the lender will assess the creditworthiness of both the borrower and the cosigner.
Having a cosigner with a good credit history can be a powerful bargaining chip. It can help secure better terms, a lower interest rate, or a more flexible repayment schedule. But remember, negotiation isn’t just about getting the best deal. It’s also about ensuring the terms of the loan are manageable for both you and your cosigner.
Repaying a Cosigned Personal Loan
Repaying a cosigner loan is typically done in monthly installments over a set period. It’s crucial for consumers to make these payments on time, as missing payments can negatively impact the credit score of both the borrower and the cosigner.
On the flip side, regular, on-time payments can help build the credit scores of both parties. This can be particularly beneficial for borrowers looking to improve their credit history.
But remember, if you default on the loan, your cosigner is legally obligated to take over the payments. This can put a strain on your relationship with your cosigner and their financial situation. So, it’s essential to have a solid plan for repayment before taking out even the best personal loans.
To make sure you never miss a payment, consider signing up for autopay, or automatic payments. With autopay, your minimum loan payment will be taken out of your checking account on its designated due date.
Legal Considerations of a Cosigner Loan
Cosigning a loan isn’t just a friendly favor; it’s a legal obligation. If the borrower defaults, the cosigner is legally bound to repay the loan. This means that the lender can take legal action against the cosigner to recover the loan amount, just as they could with the primary borrower.
Therefore, it’s crucial to understand the legal implications before becoming a cosigner or asking someone to be one. It may also be a wise idea to consult with a financial advisor or legal professional to fully understand the potential risks and responsibilities.
Other Loan Options
If a cosigner loan doesn’t seem like the right fit for you, don’t worry – there are other options available. Some popular alternatives to cosigned personal loans are:
- Secured Personal Loans: Secured personal loans will require collateral. Examples of secured loans include but are not limited to auto loans, mortgages, car title loans, or pawn shop loans. Beware that borrowers who default on secured loans risk losing their collateral.
- Credit Cards: If you have recurring expenses a credit card may be better suited for your financial needs. However, be sure to pay off your balance regularly to avoid accumulating too much credit card debt.
- Debt Consolidation Loans: Borrowers who are looking for a loan to help pay off existing bills and expenses may consider a debt consolidation loan. These loans were designed to help borrowers reduce their debts and help them stabilize their finances.
Cosigned Personal Loan FAQs
The primary borrower is the first person responsible for paying all fees associated with their loan, including the origination fee, prepayment penalty (if there is one), etc. If the primary borrower becomes unable to pay back their loan, the cosigner would then be responsible for paying back everything, including any fees.
Your lender may charge origination fees to offset their costs. They charge an origination fee for writing up the borrower’s loan contract, which includes all the details of the borrower’s loan (interest rates, terms, loan amounts, etc.). Many loans will have an origination fee. Make sure you’re aware of all fees, including the origination fee, before signing for a loan.
Most loans, including cosigned loans, require a few core documents, including:
- Proof of identity
- Proof of income
- Bank account information (sometimes)
Personal loan lenders may require you to send them copies of your documents, while others will simply ask questions about these documents.
Similar to interest rates, terms for a cosigned personal loan will vary from lender to lender. Factors that will work to determine your loan term are:
- Loan amount
- Interest rates
- Monthly payment
- Missed payments (if any)
Since the best personal loans with cosigners were designed for borrowers with lower credit scores, there usually isn’t a minimum credit score requirement. While factors like bankruptcy may hinder your chances of approval for a loan with a cosigner, your credit profile typically won’t, assuming your cosigner has an ideal financial history.
Your monthly payment will be determined by taking your loan amount, repayment terms, and interest rates into account. Loans that have increased funding amounts and shorter repayment terms will have higher monthly payments than credit with a lower loan amount or longer terms.
Many loans offer what is called a grace period. A grace period usually lasts about 1-3 days after a primary borrower signs their loan contract. During this time, the borrower may change their mind and rescind their consent to their loan offer. After they return their loan funds within this timeframe, their loan contract will essentially become void. However, any effects from the initial application process, such as a dip in credit score from a hard credit check, will still apply.
Bottom Line: Personal Loan With a Cosigner
The best personal loans with a cosigner can be good borrowing options for those struggling to secure a loan due to minimum credit score requirements. However, it’s crucial to understand the responsibilities and potential risks involved, especially for the cosigner. Always consider all your options and choose the one that best suits your financial situation in the long run.
Before you apply for a loan be sure to research lenders and compare the products and services they offer. If you decide that a cosigned personal loan is your best choice, be sure to communicate thoroughly with your cosigner about loan amounts and repayment expectations so they know what they are getting into.
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