Getting approved for a personal loan can be challenging, especially if you have limited credit history or a low credit score. One option to improve your chances is applying for a personal loan with a co-signer. This guide will explain everything you need to know about co-signed personal loans, including the benefits, risks, and alternatives to consider.
A personal loan with a co-signer is a loan where another person agrees to be equally responsible for repaying the debt. The co-signer, typically someone with stronger credit, essentially vouches for the primary borrower and agrees to make payments if the borrower cannot.
Co-signers are different from co-borrowers in a few key ways:
Adding a co-signer can significantly improve your chances of loan approval and help you qualify for better rates and terms.
There are several potential advantages to applying for a personal loan with a co-signer:
A co-signer with good credit provides additional security for the lender, increasing the odds your loan application will be approved.
Co-signers with strong credit profiles may help you qualify for lower interest rates, potentially saving you money over the life of the loan.
Lenders may be willing to approve larger loan amounts when there's a creditworthy co-signer involved.
Making on-time payments on a co-signed loan can help you establish or improve your own credit history.
While co-signing can be helpful for borrowers, it comes with significant risks for the co-signer:
According to a CreditCards.com survey, 38% of co-signers had to pay some or all of the loan or credit card balance because the primary borrower did not.
If you decide a personal loan with a co-signer is right for you, here are the steps to apply:
Keep in mind that both you and your co-signer will need to provide extensive financial information during the application process.
If you're unable to find a co-signer or prefer not to use one, consider these alternatives:
Offering collateral like a vehicle or savings account can help you qualify without a co-signer.
These loans are designed to help borrowers establish credit history.
Online platforms connect borrowers with individual lenders, sometimes with more flexible requirements.
Credit unions often have more lenient lending standards for members.
| Loan Type | Pros | Cons |
|---|---|---|
| Co-Signed Personal Loan |
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| Secured Personal Loan |
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| Credit-Builder Loan |
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If you do get approved for a personal loan with a co-signer, follow these tips to protect both yourself and your co-signer:
While requirements vary by lender, co-signers typically need a credit score of at least 670 to significantly improve the borrower's chances of approval and better terms.
Some lenders offer co-signer release after a certain period of on-time payments. Otherwise, you may need to refinance the loan in your name only to remove the co-signer.
Yes, co-signed loans appear on your credit report and impact your debt-to-income ratio, potentially making it harder to qualify for other credit.
The co-signer becomes fully responsible for repaying the remaining loan balance, including any late fees or collection costs.
A personal loan with a co-signer can be a helpful tool for accessing credit when you might not qualify on your own. However, it's crucial to understand the risks and responsibilities for both the borrower and co-signer. Carefully consider your options and only proceed if you're confident in your ability to repay the loan.
Before applying, compare offers from multiple lenders to ensure you're getting the best possible terms. Many online lenders allow you to check rates without impacting your credit score. According to Experian, the average personal loan interest rate in 2023 is 11.48%, but rates can range from 6% to 36% depending on credit score and other factors.
Remember, while a co-signer can help you qualify for a loan, the ultimate goal should be to improve your own credit and financial situation so you can borrow independently in the future.