What is a cosigner?
A cosigner is someone who takes joint responsibility for a personal loan, usually to help another person meet credit score requirements.
They're typically family members, close friends, or other acquaintances whose good credit history reduces the risk of lending money to the primary borrower. Although cosigners have legal responsibility to pay back the loan if the other person fails to make payments, they do not have legal ownership of the loan. They also cannot access the loan funds or see information about it.
Getting someone to cosign your personal loan means you are using the person's creditworthiness to get approved. The cosigner is essentially vouching for you and willing to assume responsibility for paying the loan if you are unable to pay it back. Applying with a cosigner increases the chances you'll be approved, since the cosigner acts as a safety net. This, in turn, could help the primary borrower qualify for a higher loan amount or get a more favorable APR.
What is a co-borrower?
A co-borrower is a joint or partner applicant. They share responsibility for paying the loan back and have equal access to the loan funds and loan information. They are co-owners of the loan. For example, two spouses applying for a joint loan would be co-borrowers, as they're both benefiting from the loan and working together to pay it back.
In contrast, cosigners don't usually benefit from a loan. Their main purpose is to help a primary borrower get approved. For instance, if a cosigner adds their name to an auto loan, that doesn't mean they would have ownership stake in the car once the loan was paid. Co-borrowers, on the other hand, would have a stake in the asset, since they both worked together to pay off the loan.
When should you use a cosigner?
Finding a cosigner may make sense if you wouldn't otherwise qualify for a personal loan due to having no credit or poor credit. A cosigner with excellent credit could help a younger borrower, such as a student with limited credit, get approved.
Given today's high rate environment, a cosigner could also help you snag a lower APR. Lenders may see that you are making the effort to cover the responsibilities of the loan if you have a cosigner.
Most people use a cosigner when borrowing money for the first time. A parent may cosign for a car loan or an apartment lease, for example. Another example is when a spouse with better credit cosigns a loan for their spouse who has poorer credit.
When to use a co-borrower
A co-borrower may make sense if you plan on using the money together and plan to share the cost. A couple may take out a joint loan for a trip, to finance a wedding, or for a home improvement project. A co-borrower can potentially help lower the APR on a personal loan since lenders will consider their creditworthiness.
What to look for in a personal loan
When shopping around for the best personal loans, there are a variety of factors to consider.
- Annual percentage rate (APR): The APR on a personal loan tells you how much your loan will cost you per year, expressed as a percentage. Rates are based on creditworthiness and the term of the loan and can range from 4.99% to 35%
- Loan amount: Many lenders have a cap of $50,000, while some may go as high as $100,000. You will need excellent credit to be able to borrow the maximum amount.
- Repayment terms: Lenders will offer different repayment options, ranging from two years up to 20 years. The shorter the term, the lower the interest rate. However, the monthly payment amount will be higher.
- Discounts: Some lenders will offer a discount for autopay or bundling other loans. Ask to see what discounts you qualify for.
- Fees: Lenders may have origination fees or prepayment penalties. Check fees when you're comparing lenders.
- Cosigner: If your credit score is low, then you should consider applying with a cosigner who has better credit. Check to see if the lender you're considering allows cosigners.
How to compare lenders
When looking for the best personal loans with a cosigner, first find a lender that allows you to add a cosigner. Once you have found lenders that do, compare their rates, origination fees, APRs, loan amounts, and other loan offers. You can choose to get a loan from a typical brick-and-mortar bank, a credit union, or an online-only bank. Online banks generally have better interest rates since they don't have the same overhead as regular banks.
Check your credit report and credit score
Your score will determine whether you qualify for the loan, your interest rate, and the terms. The better your credit score, the better your personal loan rates. If your score is low, it may be best to work on improving it. The difference can be thousands of dollars based on the loan amount.
Determine how much you want to borrow.
Personal loans vary from $250 to $100,000, depending on the type of personal loan. Check your budget to see how much you can afford in monthly payments.
Shop around for the best rates
Contact the different lenders to see the rate and loan terms you qualify for. You can research multiple lenders online to find the best loan term for you. Many lenders have a pre-approval process that lets you shop around without hurting your credit score.
Compare other personal loan features
Compare lenders to see if there are extra costs, such as origination fees or penalties for paying off the loan early. Some offer features like flexible payment dates or interest rate discounts.
How to apply for a personal loan with a cosigner
Once you have selected a lender that allows you to add a cosigner, you will have to submit an application. Most allow you to apply online, though some lenders require you to come into their branch offices. Lenders will have different processes to get an online personal loan, but most will require you to follow these steps:
Many lenders have an online pre-approval form where you can enter your personal information. You will need to provide your employment history, income, debt, and any other information they require. You will also need to provide the information for your cosigner.
The lender checks your credit
Lenders will then check your credit scores and history to determine if you meet their minimum requirements. This is typically a soft credit check, which will not hurt your or your cosigner's credit scores. If a lender does not have a pre-approval option, then you will not know your loan terms until you actually apply, which will impact your credit score.
The lender gives pre-approval
If you qualify for a personal loan after the lender checks your credit, it will notify you of the terms and conditions you qualify for, such as the maximum amount you can borrow, interest rate, and repayment terms. The minimum credit score depends on the lender. A pre-approval does not guarantee you will get approved.
Once you have chosen the lender you want to work with, you formally apply. This usually requires documentation and a hard credit check by the lender. If you do not qualify for a loan, the lender will notify you with an adverse letter. It will give a reason for why you were denied, the credit agency it used, and how to get a free copy of your credit report.
Accept the loan agreement
Once approved, you e-sign your loan agreements and set up your loan for funding. Many banks will disburse the money the same day or the next business day.
Having a cosigner can allow you to either qualify for a loan or get access to more competitive loan terms. But your cosigner should be well aware of the risks that come with cosigning a personal loan. And you should ensure that you are financially responsible enough to pay back the loan. Missed payments can impact your credit score as well as your cosigner's. By making regular payments on your loan with a cosigner, you can improve your own credit score with a loan you may not have otherwise received.
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