Personal Loans With a Cosigner: What You Need to Know

If you need a personal loan but worry that your credit file is too thin or your score is too low to qualify for a great interest rate on your own, a cosigner may be the answer. Here, we'll tell you everything you need to know about taking out a personal loan with a cosigner, including the role a cosigner plays, how to ask someone to cosign a personal loan, the risk a cosigner takes, and alternatives to consider.

What is a cosigner?

A cosigner is someone who agrees to take responsibility for personal loan payments if you fail to make them as agreed. There are several reasons you may need a cosigner:

• Your income is limited, and the lender is concerned about your ability to make the monthly payment.
• You don't have the required personal loan credit score.
• Your credit history includes bankruptcy, foreclosure, or short sale.
• You have credit card debt -- or other debt -- putting your debt-to-income ratio at a dangerously high level.

Why is my credit score important for a loan?

When you take out a personal loan, the lender must take your word that you will make the monthly payment until the loan is repaid in full. If you have a long, positive credit history and good credit score, it's easier for a lender to believe that you will make your monthly payments. If you have poor credit, a short credit history, or negative remarks on your credit report (even if they're in the past), offering you an unsecured personal loan makes lenders nervous.

A cosigner with good credit helps lenders feel more secure about making the loan. That's because if you miss a payment, the cosigner is expected to make the payment. If you walk away from an unsecured personal loan, the cosigner is on the hook for getting it paid.

Where can I get a loan with a cosigner?

The best personal loans using a cosigner might be found at your local brick-and-mortar bank or credit union -- or with an online lender. Not all lenders allow for a cosigner, so your first step is to check with several to find out which will let you fill out a loan application with a cosigner.

3 things to know about cosigned loans

Here are a few important things to know about cosigned loans before you sign up for one.

1. Your cosigner's credit score matters. A cosigner with excellent credit improves your odds of qualifying for a loan if you have poor credit.
2. You're not the only one impacted. The cosigner's responsibility for the loan is equal to yours. If you miss a payment or make a partial payment, they are responsible for paying the lender in full. Also, missing payments damages the cosigner's score as well as your own.
3. You can take the cosigner off later. When your credit score is high enough, you can take the cosigner off. To do this, you'll simply refinance the loan in your name alone.

How to ask someone to cosign on a loan

You're probably nervous about asking someone to cosign a loan, but remember this: Most adults have been in your position at some point. We all start out with a thin (or non-existent) credit score and many of us have needed help getting started. Here are a few pointers for asking someone to be your cosigner:

• Be upfront. Explain your situation and why you need a cosigner. It may be that you're fresh out of school and have unexpected medical bills. Perhaps you've landed a new job and need reliable transportation to get to and from work. Whatever your situation, let the potential cosigner know.
• Discuss the monthly payment. Since the cosigner will be on the hook for any payments missed, discuss how much you can afford to pay and explain how you plan to make those payments.
• Offer proof of payment. It's possible to make a cosigner feel more comfortable about signing onto your loan by promising to give them proof of payment each month. That way, they never have to worry about a late or partial payment impacting their credit score.

Alternatives to getting a cosigner

Even if you have poor credit, a cosigner is not your only solution. Here are some options to consider.

Personal loan for borrowers with no credit

Some lenders specialize in providing personal loans with no credit. This loan will come with a higher interest rate than other personal loans. Still, getting a personal loan for zero-credit borrowers allows you to be the only person on the loan application. You'll increase your credit history and credit score as you pay off the loan, too.

Personal loan for bad credit

If bad credit is standing in the way of you and an unsecured loan, try applying to the best personal loans for bad credit.

Yes, the personal loan interest rate will be higher than you might hope, but you can use this loan to reform your credit history and raise your all-important credit score.

Secured personal loan

There are two types of personal loans: a secured loan and an unsecured loan. To this point, we've discussed unsecured personal loans -- the type that requires only your signature. A secured loan is different.

With a secured loan, you put something of value up as collateral. If you miss payments, the lender can take possession of and sell this item. Your collateral could be anything of value, like a savings account, a retirement account, a vehicle, fine jewelry, art, or land.

Not every lender is equipped to make a secured personal loan (most online lenders do not), but it's worth calling around to find a lender who does deal with secured personal loans.

The bottom line

Personal loans can make life easier. Whether you need to cover debt consolidation, make auto repairs, switch from a variable rate to a fixed-rate loan, or get rid of payday loans with sky-high interest rates, a personal loan can make it happen.

Still have questions?

Here are some other questions we've answered:

• How do I get a personal loan with no credit?
• Can I get a personal loan with collateral?
• How much personal loan can I get?