If you’re not an ideal candidate for a personal loan, the key to getting approved may be to have your creditworthy friend vouch for you.
Lenders approve or deny personal loan applicants based on their ability to pay off a loan. If they don’t think an applicant will make good on a promise, then the application is denied. But you may be able to piggyback off someone with a shiny credit report.
Many lenders allow applicants to share the responsibility of paying off the loan with a more qualified individual, otherwise known as a co-signer. Adding a co-signer to your personal loan application can be the push you need to get approved. But finding someone to actually co-sign is another challenge, and not all lenders accept co-signers.
What Is a Co-Signer?
A co-signer is someone who takes responsibility for a borrower who is applying for a loan or line of credit.
For the loan applicant, applying with a co-signer means supplementing your limited or poor credit history with one that is better and more established. For the co-signer, it means taking on the risk of the primary loan holder missing a payment or, worse, going into default. Because of the risks involved, co-signers should always fully consider the applicant’s ability and willingness to pay the loan before agreeing to co-sign.
[Read: The Best Personal Loans of 2018.]
Why You Might Need a Co-Signer
If you think you won’t qualify for a personal loan based on poor or limited credit history, getting a co-signer with good or excellent credit can help bolster your application.
Typically, personal loans are unsecured, unlike mortgages and other loan types that are backed by collateral. That makes unsecured personal loans more risky for lenders, because there’s no collateral to seize if you don’t pay back your loan.
When a lender considers a personal loan application, it uses several pieces of information to determine whether the borrower will pay back the loan in full and on time. Key is payment history — if the applicant has a record of making loan or credit card payments on time. If not, a co-signer with a long history of responsibly managing credit and making loan payments on time may sway the lender to approve the application.
Lenders also consider factors like income and existing debt, as well as assets sometimes. When these numbers don’t meet their requirements, they deny the application.
“If [an applicant’s] income isn’t enough, that’s when a co-borrower or co-signer may be a good solution,” says Andrew Rostami, executive vice president and head of unsecured lending and cards at Citizens Bank.
Filling out a prequalification form on a lender’s website is one way to determine whether you should expect to qualify for the loan on your own. Prequalification never guarantees approval for a personal loan, though; lenders take additional steps to verify your information provided during prequalification before approving the loan.
If you don’t prequalify for a loan, applying with a solid co-signer will usually help. Still, a co-signer is no guarantee of approval.
Advantages of Applying With a Co-Signer
Beyond increasing your odds of approval, adding a co-signer may have other advantages.
You might get a better interest rate. Lenders typically place higher interest rates on loans offered to riskier borrowers. So, applying with a co-signer who makes loan repayment appear less risky to the lender could result in a lower interest rate on your loan, saving you money.
You could improve your credit score. If you have poor or no credit, simple access to credit can be a challenge. And if you don’t have access to credit, it can be difficult to demonstrate responsible credit use that will help you build good credit.
“Leveraging a co-signer means increasing your chances of securing a line of credit or loan, which, in turn, helps the borrower improve their credit status — assuming they manage the credit responsibly,” says personal finance expert and author Farnoosh Torabi.
Disadvantages of Applying With a Co-Signer
Most of the disadvantages of co-signing fall on the co-signer.
The co-signer is also responsible for payment. In many ways, co-signing on a loan is like applying for the loan. “The primary borrower is expected to be the one to pay off the debt, but in the event he or she is unable to make the payments, the co-signer will be asked to step in and assume the debt,” says Torabi.
Co-signers should treat a co-signed loan like their own and not co-sign unless they can pay off the loan if needed.
Co-signing may hurt a credit score. Payment history is the most heavily weighted component of your credit score. If the primary borrower stops making payments on a loan, the negative history may show up on a co-signer’s credit report, too, and ding their credit score.
Worse, a co-signer may have limited control over and knowledge of payments. It’s possible a co-signer will only find out about a missed loan payment after it’s already been recorded on their credit report. At that point, the damage is done.
It may affect personal relationships. Odds are your co-signer will be a friend or family member. If you can’t pay off the loan and it becomes your friend or family member’s responsibility, resulting resentment may strain the relationship. The negative effects of co-signing a loan can stretch far beyond the loss of money.
Getting a Personal Loan Without a Co-Signer
There are other options if you don’t think you’ll be approved for a loan and you can’t find or don’t want to use a co-signer.
Work on building your credit. If poor or nonexistent credit is preventing you from loan approval, building up your credit is a smart long-term strategy that can eventually result in not needing a co-signer.
Sign up for a secured credit card. One way to build credit from scratch is applying for a secured credit card. In general, it’s easier to be approved for a secured credit card than an unsecured card; by requiring a security deposit, secured cards are less risky for issuers. However, you can’t get the card unless you have the cash on hand to pay the deposit — usually a few hundred dollars.
If you’re approved for a secured card and use it responsibly, your credit should improve over time. You will need to make sure the issuer reports to at least one of the three main credit bureaus, though.
Apply for a credit-builder loan. Credit-builder loans involve taking out a loan that you don’t have access to until it is paid off. That is, a bank will approve you for a loan, but the actual money is frozen. You make payments on the loan until it is completely paid off. When it is, you have access to the entire loan amount minus applicable fees. More importantly, you’ll be able to show a history of making on-time loan payments.
[Read: The Best Bad Credit Loans of 2018.]
Get a loan from a friend or family member. Asking to borrow money from someone you know may be awkward, but it’s an option. It’s possible that someone who doesn’t want to co-sign on your loan may still be willing to provide you a loan themselves, especially if they’re less concerned about losing the money than they are hurting their credit score. In this case, asking them to lend the money satisfies the needs of both parties.
Depending on the size of the loan, this may or may not be a possibility. But it still should be a consideration if you’re out of options and really need the cash. Just be sure to get all of the agreed-upon terms in writing to prevent any miscommunication.
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