Personal loans can provide quick access to funds for everything from debt consolidation to emergency expenses. However, if your credit score is less than stellar or your income is inconsistent, qualifying for a personal loan on your own may be difficult. In these situations, adding a cosigner to your application can open doors-but it also comes with significant responsibilities and risks for both parties. This guide explains how personal loans with cosigners work, their benefits, and the potential pitfalls you should consider before proceeding.
What Is a Cosigner on a Personal Loan?
A cosigner is someone-often a family member or close friend-who agrees to take equal legal responsibility for repaying your loan if you’re unable to make payments. The cosigner’s credit, income, and debt-to-income ratio are considered alongside yours during the application process. If you default, the lender can pursue repayment from the cosigner, and both credit scores may suffer.
Benefits of Having a Cosigner for a Personal Loan
1. Improved Approval Odds
If your credit history is limited or your score is low, adding a creditworthy cosigner can significantly boost your chances of approval. Lenders see cosigners as an extra layer of security, making them more willing to approve applications that might otherwise be declined.
2. Better Interest Rates and Terms
A cosigner with strong credit and a solid income can help you qualify for a lower annual percentage rate (APR) and more favorable loan terms. This can save you hundreds or even thousands of dollars over the life of the loan.
3. Access to Larger Loan Amounts
With a cosigner, you may be eligible for a higher loan amount than you could qualify for on your own. This is especially helpful if you need to borrow a substantial sum for major expenses.
4. Credit Building Opportunity
If you make on-time payments, both you and your cosigner can benefit. Timely payments contribute positively to your credit history and may also help your cosigner’s credit profile, especially if they have a limited credit mix.
Risks and Drawbacks of Cosigned Personal Loans
1. Shared Legal Responsibility
Both the primary borrower and cosigner are equally responsible for repaying the loan. If you miss payments or default, the lender can pursue the cosigner for the full amount owed.
2. Credit Score Impact
The loan appears on both your and your cosigner’s credit reports. Any late or missed payments will negatively affect both credit scores, potentially for years.
3. Increased Debt-to-Income Ratio for Cosigner
The cosigned loan increases your cosigner’s total debt load, which can affect their ability to qualify for other loans or credit in the future-even if you’re making all payments on time.
4. Relationship Strain
Money matters can put stress on personal relationships. If you struggle to make payments, your cosigner may feel financial and emotional pressure, which could damage your relationship.
5. Difficulty Removing a Cosigner
Once the loan is approved, removing a cosigner from the loan is often challenging. Some lenders require refinancing or a certain number of on-time payments before releasing the cosigner, if at all.
What Makes a Good Cosigner?
For a cosigner to help your loan application, they should have:
- Good to excellent credit (typically 670+)
- Stable and sufficient income
- Low debt-to-income ratio
- U.S. citizenship or permanent residency
Lenders will review your cosigner’s financial profile as carefully as yours.
How to Apply for a Personal Loan with a Cosigner
- Check eligibility: Not all lenders accept cosigners. Research lenders that do and compare their rates and terms.
- Review credit scores: Both you and your cosigner should check your credit reports for accuracy.
- Gather documentation: Prepare proof of income, identification, and other required documents for both applicants.
- Apply together: Complete the application with your cosigner’s information included.
- Review the offer: Make sure you understand the repayment schedule, interest rate, and any fees before accepting the loan.
When Should You Consider a Cosigner?
- You have poor or limited credit history.
- Your income is insufficient to qualify on your own.
- You want to secure a lower interest rate or a larger loan amount.
- You have a trusted friend or family member willing and able to cosign.
Alternatives to Using a Cosigner
- Build your credit: Take time to improve your credit score before applying.
- Apply for a smaller loan: You may qualify for a lower amount on your own.
- Consider secured loans: Use collateral to reduce lender risk.
- Explore credit unions or community lenders: They may have more flexible requirements.
Final Thoughts
Personal loans with cosigners can be a powerful tool for borrowers who need a financial boost to qualify or secure better terms. However, cosigning is a serious commitment that can impact both parties’ credit and financial futures. Before proceeding, have an open and honest conversation about expectations, responsibilities, and what will happen if repayment becomes an issue. By understanding the benefits and risks, you can make an informed decision that supports your financial goals and preserves your relationships.