Personal loans are a flexible financing option that you can use for anything from debt consolidation to paying for a major purchase. But to get a personal loan, you’ll typically need good credit — especially if you want the best rates and terms. If you have less-than-stellar credit, you can apply for a personal loan with a co-signer. Here’s how to do it.
Decide Whether a Personal Loan Is Right for You
Before applying, you must decide whether a personal loan is your best option. On the one hand, personal loans offer flexible financing. They can also come with lower interest rates than a typical consumer credit card, which can be optimal if you’re struggling with credit card debt.
But this doesn’t necessarily mean that personal loans are low-interest. For example, if you’re looking to buy a car, a typical auto loan will offer better rates and terms than a personal loan. According to TransUnion, borrowers have taken on more than $8,000 in average personal loan debt in recent years, so these types of loans can truly add a lot to your monthly expenses (and stress levels).
Personal loans, especially ones that involve a co-signer, should be used only when it makes sense or is truly necessary. When you’re seeking to consolidate credit card debt, or if other funding options aren’t available for a large purchase, a personal loan can be a good option.
Applying for a Personal Loan With a Co-Signer: The Pros ➕
A co-signer is a second party who signs a loan agreement. Even if you’re listed as the primary borrower, the co-signer is now contractually obligated to pay the loan along with you.
For the borrower, this brings many advantages, including the following.
1. Qualify for a Loan With Poor Credit
Many lenders require you to have a credit score in the near-prime (620 and above) or prime (660 and above) range. Without a co-signer, a lender may reject your loan application outright. But if you apply with a co-signer — particularly one with strong credit — you’ll stand a better chance of receiving approval.
📚 Learn more: Heads up: Our newest post sheds light on the top personal loans for bad credit, simplifying your journey to financial recovery.
2. Qualify for a Higher Loan Amount
When you apply for a personal loan, your lender will review your credit history to determine your eligibility and the amount you qualify for. You may not qualify for a large amount if you have bad credit. A co-signer may be able to increase the loan amount and help you qualify for a larger loan.
3. Qualify for Better Interest Rates and Terms
Your credit history also plays a role in determining your interest rate and loan term. A high interest rate means you’ll be paying more for the loan. If you apply for a personal loan with a co-signer, you may qualify for a better interest rate or favorable loan term to better carve out a repayment schedule.
4. Improve Your Credit
Technically, applying for a loan with a co-signer won’t directly boost your credit score. But if you end up qualifying for a loan, that can improve your credit mix. And, by making consistent on-time payments on it, you can make progress in repairing a below-average credit score.
Applying for a Personal Loan With a Co-Signer: The Risks ➖
Many of the risks of applying for a joint loan apply to the co-signer more than the primary borrower. After all, the borrower receives the truest benefit, and the co-signer takes on the greater risk. That presents a challenge in finding the right person to cosign the loan. Here are some reasons why it might be risky.
1. You May Take on More Debt Than You Can Manage
One of the main risks is that by qualifying for a higher loan amount, you may find yourself faced with more debt than you can manage. Make sure that the monthly payments fit into your budget to prevent yourself from defaulting on the loan.
2. Co-Signers Take on More Debt
The primary borrower will usually make payments on the loan, but the co-signer is equally responsible. As a result, a joint loan will impact the co-signer’s debt-to-income ratio, which can affect their ability to qualify for loans. And if you default on the loan entirely, the co-signer becomes responsible for the loan.
3. Co-Signer’s Credit History Can Be Damaged
Missed or late payments won’t just show up on your credit report. They’ll also affect your co-signer. When you apply for a loan with a co-signer, that individual’s credit is linked to yours, and you can cause damage if you fail to repay the loan on time.
How to Apply for a Personal Loan With a Co-Signer: Step-by-Step
Should you decide to pursue a personal loan with a co-signer, you’ll have to find the right co-signer and the right lending program. Here’s what to expect in the loan application process.
1. Find a Potential Co-Signer
While you might wait until you start shopping for loans, it never hurts to find a co-signer beforehand. Some possible options include:
- A close family member with excellent credit
- A close friend that you’re comfortable talking about money with
- A personal or professional mentor that you know well and trust
For example, young adults might ask their parents to co-sign a personal loan since the relationship is usually close enough that the parents can agree and monitor the loan repayments.
2. Discuss Repayment Options With Your Co-Signer
From a contractual standpoint, your co-signer is assuming a great deal of risk while you’re reaping the benefits of their strong credit score. Make sure to have a candid conversation that addresses future issues, such as the possibility that you might struggle to make your payments.
Since most co-signers are close family members or friends, it’s important to be honest about possible challenges before they interfere with your relationship. Once you’re on the same page, you can move on to shopping for lenders.
3. Find the Right Lender
Not all lenders will accept a co-signer. You’ll need to spend some time researching possible lenders to find the right option.
Online lenders generally make it easy to research and compare rates and terms, and they usually provide their requirements on their websites. But your co-signer may already know of a good lending option, which can make the process all the easier.
4. Compare Rates and Terms
With so many lenders out there, it’s important to compare rates and terms to ensure that you get the best deal.
The best way to go about this is to compare the interest rates and loan terms of at least three lenders. Some online lenders allow you to prequalify, which will give you a better idea of your loan amount and the cost of repayment.
5. Gather Your Documentation
To get approved for a loan, you and your co-signer must provide documentation regarding your current financial situation. The lender will perform a credit check for you and your co-signer, but each of you must still provide:
- Bank statements
- Tax records
- Pay stubs
You and the co-signer must demonstrate proof of income. This reduces the lender’s risk and ensures you receive a favorable loan. The lenders will also want to assess your current debts and your credit score.
6. Complete the Application
Every lender will use a slightly different process but will generally require the documentation you gathered in step 4.
Remember that this process will involve a hard credit inquiry, which will temporarily lower your credit score and your co-signer’s. If you plan on applying to multiple lenders, complete the applications within the same 30-day window to minimize the damage.
7. Respond to Any Additional Lender Requests
The loan approval process varies by lender and may take additional time. Make sure to respond quickly if the lender requests additional information or documentation. That way, the process will go as smoothly as possible.
8. Sign the Loan Agreement
Assuming you get approval, you and the co-signer must sign the loan agreement. This makes the co-signer responsible for the loan if you fail to make payments.
Once you sign the agreement, the money will be dispensed directly to you, typically as a lump-sum payment. Any origination fees or other lending costs will be paid at this time, though they might also be rolled into your monthly payments.
9. Stick to Your Repayment Schedule
When you apply for a personal loan with a co-signer, the most important step of all is to stick to your repayment schedule. After all, your co-signer put a lot on the line to help you get this loan. Don’t risk their credit by missing payments. In fact, making consistent payments will improve your credit score and reduce your need for a co-signer for future loans.
Conclusion on How to Apply for a Personal Loan With a Co-Signer
Applying for a personal loan with a co-signer is great for young adults who are still building their credit and can rely on their parents for support. But it can also be a solid option for those with low credit who need flexible funding to cover debts or a large purchase.
Alternatively, you might consider working on your credit to eliminate the need for a co-signer. But if you need money today, you might be able to get by with a little help from your friends.