Borrowers with fair or poor credit, generally defined as a credit score less than 670 on an 850 scale, often have a tough time getting a loan. People with a low score are less likely than average to make their loan repayments on time and banks understandably are reluctant to make loans they may never get back. A qualified cosigner can help get a borrower approved when they don't otherwise meet minimum lending requirements – but that doesn't mean that everyone qualifies for a cosigner loan.
A cosigner promises payment if the borrower defaults on a loan. It provides an additional layer of insurance for the lender, but there's no obligation to accept a cosigner and the bank could deny you anyway.
What is a Cosigner Loan?
Lenders make approval decisions and establish an interest rate based on the borrower's risk, or how likely the borrower is to make the loan repayments in full and on time. If a potential borrower has poor credit or no credit history, they present a higher risk to the lender and the loan application is likely to be denied.
However, if someone with excellent credit comes along and offers to take responsibility for the loan, the risk to the bank diminishes. That's the basis of a cosigner loan. In this arrangement, the cosigner agrees to pay off the debt if the borrower does not make the payments. The lender can be more confident about approving the loan when the borrower's creditworthiness doesn't quite meet the institution's standards, because there's another person to pursue.
What are the Advantages of a Cosigner Loan?
Cosigners play an important role in the lending world and, without them, many borrowers would have difficulty getting a loan. Here are the advantages of having a cosigner:
Helps a borrower get financing: With the exception of a few hard money lenders who specialize in lending money to subprime borrowers, lenders generally will not touch applicants who fail to meet the minimum lending requirements. But a lender may be more willing to lend money if there's a cosigner because it offers an extra layer of protection. Having a cosigner in place means you can lease a car, attend school or move into a community you might otherwise not be able to afford on your own.
Helps a borrower build credit: It's an irony of the lending world that you have to have credit to build credit. One of the best ways to build your credit score is to take out a loan and make the repayments on time each month to show that you're a reliable borrower. However, it can be extremely challenging for people without a credit history to get a loan in the first place. With a cosigner on board, you have a better chance of building a healthy credit score that eventually will allow you to stand on your own two feet.
Get a better rate: If you're a borderline applicant who scrapes through the minimum lending requirements, then the bank will offer you a high-interest rate to offset its risk. Banks impose higher rates on marginal borrowers because there's a higher risk that you'll default on the loan and the bank will lose its money. You definitely should consider using a cosigner in this scenario, as the additional security could allow the bank to offer you a more attractive rate.
What Types of Loans Accept Cosigners?
Most types of loans will accept co-signers and the process is common with student loans and auto loans. Mortgage lending is another area where co-signers are relatively common, especially if the borrower is a first-time home buyer.
If you're after a personal loan with cosigner, Wells Fargo and Citibank have some options. Most credit unions will also accept co-signers on unsecured loans if the borrower does not have a long enough borrowing history to get approved for a loan on his own. There are no hard-and-fast rules, however, and it's up to the individual lender whether it will accept a cosigner for a particular loan product.
But I've Been Denied a Car Loan with Cosigner
If you think that anyone can get a loan with a cosigner, think again. If your credit is not in the best place, for instance, you've had some issues with past-due payments, collections, court judgments, evictions and too many recent credit inquiries, then a lender might deny your loan application even if you offer up a cosigner with stellar credit. If you're clearly in trouble, then a lender almost certainly will be unwilling to approve new debt.
The bottom line is that no lender is obligated to lend you money. Banks are very selective when deciding whether to approve a loan. The institution may decide that you are just too big a risk, and even the promise of a creditworthy cosigner may not be enough to persuade a potential lender that you should be approved for credit.
Who Does Get a Cosigner Loan?
Generally, it's borderline applicants who get approved when a cosigner offers a credit assist. Lenders want to know that you have a solid history of borrowing, have sufficient income to repay the debt and have consistently paid loans in the past, even if you don't quite meet the minimum approval criteria on your own.
For instance, if you fall into one of these categories, then a co-signer might nudge your loan application over the line:
- have a stable job and a good income but no established credit
- meet the minimum income requirements but are carrying slightly too much debt
- are self-employed
- recently changed jobs, or your income is new because you just graduated college
- fall just below the minimum lending standards
By law, you have the right to know why your loan application was rejected. The lender must give you a specific reason, for example, "Y_ou haven't been employed long enough," instead of just saying you "_failed to meet minimum standards." Understanding why you were denied can help you figure out whether a cosigner will increase your chances of getting a loan approval.
What are the Personal Loan Cosigner Requirements?
Another major consideration is the identity of the cosigner. Lenders have very clear specifications about who is, and who is not, an acceptable cosigner. If the co-signer does not meet the lender's exact requirements, then you can kiss goodbye to your loan application. Here's what most lenders are looking for in a cosigner:
This one is obvious; to be accepted by the lender, the cosigner is usually required to have a good or excellent personal credit rating. That means a FICO score above 740 – the higher, the better. People with high credit scores have proven themselves to be financially responsible and pay their obligations on time. If your cosigner has only fair credit, then it's unlikely that you'll get your loan.
Ability to pay
It's the cosigner's job to step in and pay when you cannot, so the bank will look for evidence that the cosigner has enough income to cover the loan obligation. The lender may call for bank statements, tax returns and pay stubs to verify the cosigner's income in exactly the same way as if the cosigner were applying for the loan.
Low debt-to-income ratio
The debt-to-income ratio is the percentage of your cosigner's monthly income that goes toward paying her debt obligations. Bear in mind that most people will have their own mortgages, auto loans, credit card bills and personal debt obligations to manage. If the cosigner's debt load is high relative to her income, then the bank probably will deny the loan application.
When looking at cosigners, banks like to see people who have been in their jobs for a relatively long period, and who have lived in the same community for a long period, too. These people are perceived as stable and are much less likely to lose their jobs.
How To Choose a Cosigner
The first step to getting a cosigner loan is to find a suitable cosigner. Most borrowers turn to their parents, spouse, relatives and close friends for assistance, but the most important thing is they meet the lender's requirements and are willing to act. Do not underestimate how big an ask this is. Not only is the cosigner promising to pay the loan in full if you do not, but he can also be on the hook for late fees and collection costs. The borrower's late payments will appear on the cosigner's credit report and hurt his credit score.
Fundamentally, a cosigner is guaranteeing a borrower who has already been identified as someone who doesn't deserve the loan. It's a huge risk to cosign a loan. Someone who initially indicates his willingness to act as a cosigner may change his mind when he realizes the risks involved. This can be a huge stumbling block in your efforts to get a cosigner loan.
You might be tempted to turn to "Hire a Cosigner" and other matching services if your relatives do not qualify, but beware the risks. Cosigners-for-hire tend to charge hefty fees for their services and will get access to your confidential financial data. Be sure the read the fine print and watch out for any hidden terms and fees if you're going down this route.
Steps to Getting a Co-signed Loan
With a cosigner on board, the next step is to comparison shop and find a lender who offers the type of loan product you're after, for example, personal student loans with cosigner approval. Loans are not created equal. Both you and the cosigner must be happy with the following terms and conditions:
Annual percentage rate. Your loan's APR is the cost of borrowing –
the interest and fees –
over the course of a year. Lenders display their rates as APRs so you can quickly compare loans. Fixed or variable APR. Fixed APRs stay the same throughout the loan term, which means your monthly loan repayment stays the same. Variable APRs can go up or down over time in line with market interest rates. You could pay less with a variable rate if interest rates are on the decline, but it's had to predict your monthly obligation. Loan terms. The longer the term, the lower your monthly payments. However, you will pay more interest over the term of the loan. * Fees. Some loans come with application fees and "prepays," a penalty that stops you paying the loan off early to save on interest. Read the fine print so you both know what you're in for.
Once you've found a lender that meets your needs, it's time to start the approval process. Cosigner loans involve more paperwork than regular loans because you're adding another person into the mix. In addition to providing your own bank statements and proof of income, the bank will have a whole bunch of paperwork for the cosigner to fill out. Generally, you'll wait a few business days to get an offer that includes loan amounts, terms and rates. From there, it's just a matter of signing the loan paperwork and the cosigner guarantee.
- Experian: What is a Good Credit Score?
- How to Find a Cosigner for Your Student Loans | Credible
- Supermoney: How to Get Personal Loans with a Co-Signer
- Federal Trade Commission: Your Equal Credit Opportunity Rights
- Hire a Cosigner: Homepage
- Consumer Financial Protection Bureau. "What Is a Debt-to-Income ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed Aug. 26, 2020.
- Federal Trade Commission. "Co-Signing a Loan." Accessed Aug. 24, 2020.
- Wells Fargo. "Secured Loans and Lines of Credit." Accessed Aug. 24, 2020.
- SoFi. "Using Collateral on a Personal Loan." Accessed Aug. 24, 2020.
- First Alliance Credit Union. "The Basics for Needing a Cosigner on a Loan." Accessed Aug. 25, 2020.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer specializing in finance and tech. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.