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If you don’t qualify for a personal loan due to your credit score, a co-signer might be able to help you gain approval. You’re more likely to find a co-signer by asking a family member or close friend. It’s also wise to consider applying for a personal loan with a co-signer to increase your chances of approval. Here’s what you need to know about using a co-signer to qualify for a personal loan.
Key Takeaways
- A co-signer is someone with good credit who agrees to take responsibility for your loan if you default.
- Co-signers are different from co-borrowers. Co-borrowers usually have equal claim to ownership and equal responsibility for paying the debt.
- Your co-signer is usually someone who trusts you and with whom you have a friendship or family relationship.
What Is a Co-Signer?
A co-signer is someone who agrees to take responsibility for your loan if you default. In general, a co-signer is only required to make payments on the loan if you fail to do so.
Conversely, a co-borrower shares equal responsibility for making on-time payments and has an equal ownership claim of any asset purchased with the loan. For example, a co-signer on a car loan can be on the hook for the payments but cannot repossess the car. On the other hand, a co-borrower on the car loan is responsible for the payments but has an equal claim to the car and might be listed on the title.
When Do You Need a Co-Signer?
In general, you might need a co-signer to help you qualify for a personal loan that you might not otherwise be able to get. There are two main reasons why you might not be able to get approval for a personal loan:
- Credit: If you have a poor credit score, you might not qualify for the best rate on a personal loan—or you might not get approved at all. Someone with good credit can lend their reputation to you so you can get the loan. Similarly, a young person with no credit history might struggle to get approved. A co-signer can help a young person get the loan and then establish their own credit through on-time payments.
- Income: Even with fair to good credit, you might have difficulty getting approved for a personal loan if the lender doesn’t think you have adequate income to make payments. In this case, a co-signer with a higher income might help you qualify for the loan.
How to Find a Co-Signer
Typically, nearly anyone can be a co-signer on a personal loan. However, in many cases, finding a co-signer is a matter of trust. As a result, you’re likely to have better success when you ask a friend or family member to co-sign.
When looking for a co-signer, it’s important to show that you’re unlikely to default. Because the co-signer is on the hook, you generally need to be able to show that you’ll be responsible for the loan and likely to pay it off.
In addition to using friends or family, some services offer to match you with a co-signer. In this case, you sign up to have someone act as your co-signer. However, you normally need to pay a fee for this service. The fee depends on the size of the loan, your credit situation, and other factors.
What to Look for in a Co-Signer
Your co-signer should be in a good financial position, with relatively low levels of debt and an income that can handle the payments. When considering an application with a co-signer, a lender usually treats the co-signer as if they are the primary borrower. Their ability to pay and their current debt-to-income (DTI) ratio will be considered. It’s important to note that the loan payment from a co-signed loan might be counted as part of a co-signer’s DTI ratio and can impact their ability to get loans in the future.
Finally, a co-signer needs to have good to excellent credit. You’re unlikely to get approved with a co-signer if they don’t have good credit.
Alternatives to a Co-Signer
In some cases, you might be unable to secure a co-signer for your personal loan. Because a co-signer can be impacted as if the debt is theirs (even when it isn’t), it might be challenging to convince someone to act as your backup. In that case, you might need to consider other options.
Bad Credit Personal Loan
Several personal lenders are available; some specialize in providing loans to those with lower credit scores. It’s possible to get a personal loan with bad credit, but you might have to pay a much higher interest rate and fees. You might also be able to find a personal loan that doesn’t require a credit check.
If you can’t wait to improve your credit score to apply for a loan, a bad credit loan might help you work toward your goals. However, plan to pay off the debt sooner if possible to reduce the total cost of high-interest charges, but only if the new loan does not charge prepayment penalties.
Secured Loan
If you can’t find a co-signer and you cannot get a personal loan another way, you might be able to get a secured personal loan. Some lenders accept collateral, such as a car. However, if you default on the payments, the lender can repossess your vehicle. Securing your debt with a valuable item might get you approved for a loan, but there are risks if you cannot make the payments.
Ask for Help
Sometimes, friends or family members might not be willing to co-sign, but they might agree to lend you the money directly. If this is the case, you should sign a promissory note with your loved one and come up with an agreement on an interest rate and timeline. Realize, though, that if you don’t repay the loan, it could strain your relationship.
You could also ask for direct help paying for an emergency expense or funding your basic living expenses if that’s why you’re looking for a loan. Some friends and family members might feel more comfortable directly paying your bills and giving the money as a gift than risking their own credit by co-signing on a personal loan.
Finally, find out if there are local organizations in your area that can help. Some agencies can help you with utility bills, and food pantries can provide you with groceries. These programs might help you meet your needs so you can avoid getting a loan.
Legitimate lenders may charge loan origination fees for processing your credit application and reviewing your credit history to determine whether to approve you for a loan. However, be aware of advance-fee loan scams from companies that offer guaranteed approval even if you have a low income or a poor credit history. These companies scam you by charging an upfront fee, but they cannot approve loans.
Can You Hire a Co-Signer for a Personal Loan?
Some services match co-signers with those needing help getting approved for a personal loan. You will pay an extra fee on top of your loan costs, so be sure to factor that into your decision.
What If I Can’t Find a Co-Signer for a Loan?
If you can’t find a co-signer for a personal loan, you might need to look into other options. You can compare bad credit loans to see if you can secure funding with a much higher interest rate, or you can check if any of your family or friends are willing to provide you with the money you need to meet your obligations.
Can You Be Denied a Personal Loan with a Co-Signer?
It’s always possible that a lender will deny your personal loan application, even if you have a co-signer. However, if they deny your loan, they need to provide an explanation as to why the application was denied, which can help you figure out what you need to do to get approved on the next go-round.
How Do People Use Personal Loans?
Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, and Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.
The Bottom Line
If you don’t qualify for a personal loan, some lenders allow you to use a co-signer to get approved. However, if you have a co-signer, they’re on the hook for payments if you default.
Before looking for a co-signer, see what other options you have, and make sure you have a plan to pay down your debt to maintain a good relationship with your co-signer.
