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Getting a Personal Loan with a Cosigner

ByWallstreet Observer

Quick answer

  • A cosigner can significantly improve your chances of getting approved for a personal loan, especially if you have a lower credit score or limited credit history.
  • The cosigner must have good credit, stable income, and be willing to take on the legal responsibility of repaying the loan if you default.
  • Be sure to understand the risks involved for both you and your cosigner before proceeding.
  • Shop around with different lenders to compare rates, terms, and fees.
  • Carefully review all loan documents before signing.

What to check first (before you choose a payoff plan)

Balance and rate list

Before you even think about applying for a loan, gather all the details about your existing debts. This includes the total amount owed, the interest rate (APR), and the minimum monthly payment for each. Knowing this information is crucial for understanding your overall debt burden and for comparing potential new loan offers. For example, if you have high-interest credit card debt, a personal loan might be a good option to consolidate it and potentially lower your interest payments.

Minimum payments

Understand the minimum payments required for all your current debts. While it might be tempting to only pay the minimum, this can lead to paying significantly more in interest over time and can prolong your debt repayment journey. When considering a new loan, ensure the new minimum payment, combined with your other essential expenses, fits comfortably within your budget.

Fees or penalties

Be aware of any fees associated with your current debts, such as late fees, over-limit fees, or prepayment penalties. Similarly, research any fees a new lender might charge, including origination fees, late payment fees, or prepayment penalties. These can add up and impact the true cost of borrowing. Always check the official loan agreement or ask your lender for a full fee schedule.

Credit impact

Understand how your credit score is calculated and how taking on new debt might affect it. Applying for new credit typically results in a hard inquiry on your credit report, which can temporarily lower your score. Successfully managing a new loan and making on-time payments can, over time, improve your credit score.

Cash flow stability

Assess your current income and expenses to determine your stable monthly cash flow. This is the amount of money left over after covering essential living expenses. A stable cash flow is essential for comfortably managing loan payments and avoiding default. If your cash flow is tight, consider ways to increase income or reduce expenses before taking on additional debt.

How to get a personal loan with a cosigner (step-by-step)

1. Assess your need for a cosigner:

  • What to do: Honestly evaluate your creditworthiness. Do you have a low credit score, a short credit history, or a history of late payments? If so, a cosigner is likely necessary.
  • What “good” looks like: You’ve determined that your financial profile might not qualify you for a loan on your own, making a cosigner a strategic step.
  • Common mistake: Assuming you don’t need a cosigner when your credit history is weak. This leads to multiple rejected applications, further damaging your credit.

2. Find a suitable cosigner:

  • What to do: Approach someone with a strong credit history, stable income, and who trusts you implicitly. This is often a family member or a very close friend.
  • What “good” looks like: You’ve identified a person who is financially responsible, understands the commitment, and is willing to put their credit on the line for you.
  • Common mistake: Asking someone without fully explaining the risks involved, leading to strained relationships later.

3. Discuss the loan terms and responsibilities:

  • What to do: Have an open and honest conversation with your potential cosigner about the loan amount, interest rate, repayment period, and what happens if you miss a payment.
  • What “good” looks like: Both you and the cosigner are fully informed and comfortable with the terms and the potential consequences.
  • Common mistake: Glossing over the details, assuming the cosigner fully understands their liability without explicit discussion.

4. Shop for lenders:

  • What to do: Research banks, credit unions, and online lenders that offer personal loans with cosigners. Compare their interest rates, fees, repayment terms, and customer service.
  • What “good” looks like: You have a list of potential lenders and have gathered preliminary information on their offerings for borrowers with cosigners.
  • Common mistake: Applying to the first lender you find without comparing options, potentially missing out on better terms.

5. Gather required documentation:

  • What to do: Prepare your personal financial information (income verification, employment history, bank statements) and have your cosigner do the same.
  • What “good” looks like: All necessary documents are organized and readily available for submission to the lender.
  • Common mistake: Delaying document gathering, which can slow down the application process significantly.

6. Submit the application:

  • What to do: Complete the loan application, clearly indicating that you have a cosigner. Both you and your cosigner will likely need to sign the application and any accompanying disclosures.
  • What “good” looks like: The application is filled out accurately and completely by both parties.
  • Common mistake: Incomplete or inaccurate information on the application, leading to delays or rejection.

7. Loan review and approval:

  • What to do: The lender will review your application, credit history, income, and your cosigner’s financial profile.
  • What “good” looks like: The lender approves your loan based on the combined financial strength of you and your cosigner.
  • Common mistake: Assuming approval is guaranteed; lenders have specific criteria for both the primary borrower and the cosigner.

8. Review and sign the loan agreement:

  • What to do: Carefully read the entire loan agreement. Pay close attention to the APR, repayment schedule, late fees, and any clauses regarding the cosigner’s responsibilities.
  • What “good” looks like: You and your cosigner understand all terms and conditions and are in agreement before signing.
  • Common mistake: Signing the agreement without fully understanding the legal obligations, especially for the cosigner.

9. Receive the funds:

  • What to do: Once the loan agreement is signed, the lender will disburse the loan funds, usually via direct deposit into your bank account.
  • What “good” looks like: You have the funds available to use for your intended purpose.
  • Common mistake: Mismanaging the loan funds or not having a clear plan for their use.

10. Make on-time payments:

  • What to do: Establish a system for making your loan payments consistently and on time. This is your primary responsibility.
  • What “good” looks like: All payments are made by their due dates, preventing late fees and negative impacts on both your and your cosigner’s credit.
  • Common mistake: Forgetting to make payments or making late payments, which harms both borrowers and the cosigner.

Options and trade-offs

  • Secured Personal Loan: Requires collateral (like a car or savings account).
  • When it fits: If you have assets to pledge and want potentially lower interest rates or are struggling to get approved for an unsecured loan. The trade-off is losing your collateral if you default.
  • Unsecured Personal Loan: Does not require collateral.
  • When it fits: Most common type of personal loan. It’s suitable for borrowers with good credit who don’t want to risk their assets. Approval depends heavily on creditworthiness.
  • Debt Consolidation Loan: A single loan used to pay off multiple existing debts.
  • When it fits: If you have multiple high-interest debts (like credit cards) and want to simplify payments and potentially lower your overall interest rate.
  • Balance Transfer Credit Card: Move high-interest credit card balances to a new card with a 0% introductory APR.
  • When it fits: Ideal for paying down credit card debt quickly without interest for a limited period. Requires good credit to qualify and a plan to pay off the balance before the intro period ends.
  • Credit Counseling: Working with a non-profit agency to manage debts.
  • When it fits: If you’re overwhelmed by debt and need professional guidance, a debt management plan, or help negotiating with creditors.
  • Hardship Plan: Negotiating with your current lender for temporary relief.
  • When it fits: If you’re facing a temporary financial setback (job loss, medical emergency) and can’t make payments. This can involve reduced payments or a temporary pause, but may have long-term consequences.
  • Using Savings: Tapping into your emergency fund or other savings to pay off debt.
  • When it fits: If you have substantial savings and a clear plan to rebuild them. It can save on interest but depletes your safety net.
  • Borrowing from a 401(k): Taking a loan against your retirement savings.
  • When it fits: Can be a last resort if other options are exhausted. However, it carries risks like losing potential investment growth and penalties if you leave your job.

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| Mistake | What it causes

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