Can You Have a Co-Signer for a Personal Loan?
When you need to borrow money for things like debt consolidation, major expenses, or other personal reasons, getting approved for a personal loan can be challenging if your credit score or income doesn't meet a lender's requirements. This is where having a co-signer can potentially help open the door to approval and better terms. But co-signing also carries significant risks that both parties should carefully consider.
What is a Co-Signer and How Does Co-Signing Work?
A co-signer is a third party, such as a relative, spouse, or trusted friend, who agrees to share equal legal responsibility with the primary borrower for repaying a loan or credit account. By co-signing, their credit history and income are incorporated into the overall application, in addition to the borrower's own credentials.
The co-signer acts as a guarantor that the debt will be repaid as agreed in the loan contract. If the borrower fails to make the payments, the lender can then attempt to collect the outstanding balance from the co-signer.
For the borrower, having a co-signer with good or excellent credit can significantly increase their approval odds when their own credit is subpar or they lack sufficient income to qualify on their own. It may also allow them to borrow more money at better interest rates since the lender's risk is reduced.
Key Benefits of Adding a Co-Signer
There are several key potential advantages to having a creditworthy co-signer:
Higher Approval Rate
Personal loan approval odds increase for borrowers with poor credit scores, thin credit files, or limited income when they apply jointly with a co-signer who has a strong credit profile. Lenders see co-signed loans as much less risky.
Access to Better Terms
Along with higher approval chances, a co-signer's positive credit and income can help a borrower qualify for a lower interest rate by minimizing the perceived risk for the lender. Some may also be able to borrow larger loan amounts.
Build Credit for the Borrower
If the primary borrower makes all their payments on time, having a co-signed personal loan can help build their credit history and credit scores over time through on-time repayment records being added to their report.
Requirements Co-Signers Must Meet
While co-signers can be extremely helpful for getting personal loans approved and secured, lenders do set some baseline requirements that they look for:
Minimum Credit Score
Most lenders want co-signers to have very good or excellent credit scores, often requiring a FICO score of 700 or higher. This ensures they have a proven track record of responsible credit management.
Sufficient Income
Co-signers typically have to meet a minimum income threshold, such as having enough cash flow to cover full repayment if the borrower were to default on the loan payments.
Residency Requirements
Some lenders may require the co-signer to live in the same state as the borrower or only accept co-signers who reside in states where the lender operates and is licensed.
Relationship to Borrower
Certain financial institutions only allow co-signers who are closely related to the borrower, such as a parent, spouse, sibling, etc. Though sometimes very trusted friends are accepted.
It's also worth noting that there are some personal loan lenders who don't accept co-signers at all, so checking on a particular lender's co-signer policy is advisable.
Risks of Co-Signing a Loan
While the ability to add a co-signer is certainly advantageous in many personal loan situations, there are also major risks that co-signers need to be fully aware of before signing on the dotted line.
Equal Legal Responsibility for Repayment
As a co-signer, you are taking on full, equal legal liability for repaying the entire loan balance if the borrower fails to make their payments for any reason. The debt essentially becomes one of your own credit obligations that you owe.
Negative Credit Score Impact
If the borrower misses payments or goes into default, this negative information will also start appearing on the co-signer's own credit reports from the three major bureaus. Their credit scores can then take a major hit, affecting their ability to qualify for other loans or credit cards in the future.
Difficulty Removing Yourself Later
Depending on the lender's policies, it can be extremely difficult for co-signers to get their name removed from a personal loan even if the borrower refinances or tries to release the co-signer at a later date. The lender may require full repayment first before removing a co-signer.
Assets and Wages at Risk
Worst case scenario, if the personal loan ends up in default with no repayment, creditors have the legal right to pursue recovery from co-signers through methods like garnishing wages or even putting liens on assets like homes and cars.
In many cases, co-signing is a situation that financially benefits only the borrower, while putting the co-signer's own financial standing at significant risk if the borrower does not uphold their end of the loan agreement.
Minimizing the Risks as a Co-Signer
If you do decide to co-sign a personal loan to help out a trusted friend or relative, there are some precautions you should take to protect your own interests:
- Set strict expectations with the borrower upfront about meeting payment obligations.
- Have a plan in place for covering payments yourself if needed.
- Ask the lender about options for releasing yourself as co-signer later.
- Closely monitor your credit reports for any late payment reporting.
- Avoid co-signing if you can't realistically afford to repay the entire loan.
There are situations where co-signing on a personal loan can make sense financially, such as helping a young adult child secure their first major loan and build credit responsibly. But co-signers always take on substantial risk, so it's crucial to go into any such arrangement with eyes wide open about the potential ramifications to your own credit history and finances.
Conclusion
Having a co-signer can indeed be extremely beneficial for getting approved for a larger personal loan amount at a lower interest rate. But there are also major risks involved for co-signers that shouldn't be taken lightly. As with any big financial decision, it's wise to carefully weigh the pros and cons before proceeding. See: Securing Loans Without A Cosigner
The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
Personal Loans Guide
Personal loans, a popular financial tool, offer individuals access to funds with or without collateral. These loans, provided by banks or online lenders, cater to diverse needs like debt consolidation, home improvements, or unexpected expenses and do not require any collateral. Borrowers receive a lump sum and repay in fixed monthly installments over a specified term, typically ranging from one to seven years. Interest rates, based on creditworthiness, can be fixed or variable, impacting the total repayment amount. While they provide financial flexibility, understanding terms, fees, and the impact on credit is crucial for responsible borrowing and effective financial management.
Guide to Interest Rates in Personal Loans
When you take out a personal loan, one of the most important factors to consider is the interest rate. The interest rate determines how much you'll end up paying over the lifetime of the loan in addition to the principal amount you borrowed. A higher interest rate means you'll pay more in interest charges, while a lower rate will reduce the overall cost of the loan. Understanding interest rates and how they work is crucial for making an informed decision when obtaining a personal loan.
Is It Better to Get a Loan Online or In Person?
When you need to borrow money for major expenses like a home, car, debt consolidation, or emergency costs, you essentially have two main options: apply for a loan online or go through the traditional route of an in-person application at a bank branch. Both alternatives have their own set of pros and cons to weigh carefully.