Guide to Getting a Personal Loan With a Co-signer

Understanding the role of a co-signer

A co-signer helps your loan application by agreeing to repay the loan if you don’t. Lenders look at their credit score and income along with yours, which can make approval more likely. You’ll have full access to the funds, but the co-signer shares equal responsibility for paying back the loan.

You might need a co-signer if you:

• Have a low or unstable income
• Have limited credit or no credit history
• Work gig or freelance jobs
• Have a high debt-to-income (DTI) ratio
• Don’t meet the lender’s minimum age requirement

» MORE: Getting a personal loan with bad credit

Co-signer vs. co-borrower

Both co-signers and co-borrowers share the ultimate responsibility for a loan, but these roles are different in terms of their access to funds and repayment expectations.

A co-signer’s primary role is to help you qualify for a loan you might not otherwise have access to. As the primary borrower, you are expected to make the payments, and you are the only one with access to the money you borrow. If you fail to make payments, that’s when the co-signer would be required to step in and pay back the loan.

A co-borrower, on the other hand, has equal access to the loan funds and equal expectation of ongoing repayment. It’s common for co-borrowers to have a shared goal for their loan; examples might include business partners securing a small business loan or spouses applying for a car loan or mortgage.

Benefits of a co-signer

A co-signer can be beneficial during the application process because they strengthen your application and can improve your chances of getting approved.

Sometimes lenders offer borrowers who find a co-signer better terms, such as lower interest rates, longer repayment terms or larger loan amounts. Adding a co-signer can help you access the funds you need more quickly so that you can start building a positive credit history through on-time payments.

“Having a co-signer could lower your interest rate in some cases,” Trevor Smith, a corporate branch manager at Wasatch Peaks Credit Union in Ogden, Utah, told us. “Many institutions will use the highest score of the two borrowers to determine which rate is given. Having a co-signer may also help to qualify for higher loan amounts. In a lot of cases, income can be combined, which makes it more likely to get higher loan amounts.”

Be sure to make timely payments since this will positively impact both your credit and that of your co-signer. Late and missed payments, however, can not only damage your finances but could also harm your relationship.

Applying for a personal loan with a co-signer

Applying for a personal loan with a co-signer involves a few extra steps, but it can help you qualify for better terms. Here’s what to do:

1. Find lenders that allow co-signers

Not all lenders accept co-signers, so start by narrowing your options to those that do.

2. Check eligibility requirements

Review minimum credit scores, income levels and any other conditions before applying.

3. Gather required documents

You’ll need to provide personal and financial information for both you and your co-signer. Before applying, check that your credit score and DTI ratio meet the lender’s requirements. Many lenders look for a minimum credit score of 580 and a DTI ratio below 36%. If you don’t meet these standards, a co-signer who does could improve your chances of approval.

Commonly required personal details include:

• Social Security number
• Date of birth
• Phone number
• Physical address
• Employment status and employer name
• Gross monthly income and source
• Monthly rent or mortgage payment amount

4. Submit the loan application

Fill out the application with all required documents. The lender will run a hard credit check on both you and your co-signer.

5. Review the loan terms

If you’re approved, review the interest rate, loan term and repayment obligations. Your co-signer is equally liable if you default, so make sure both parties understand the responsibilities.

Most lenders approve applications within five business days. You may receive funds as soon as the next business day.

» MORE: Best personal loans if you have a co-signer

Responsibilities and risks for co-signers

Agreeing to serve as your friend or family member’s co-signer is a serious undertaking that can have long-term financial ramifications. It’s important for prospective co-signers to consider the risks and responsibilities of this role carefully before they commit.

Financial and legal risks

The biggest risk for co-signers is that the primary borrower stops making payments, and they have to assume the loan themselves. Unfortunately, co-signers have the same responsibilities for paying off a loan as primary borrowers, but they don’t receive any loan funding.

If the primary borrower has late or missing payments, it can negatively impact both the co-signer's and the primary borrower's credit.

Leslie Tayne, the founder of Tayne Law Group in Melville, New York, explained: “The co-signer could also be sued or have their wages garnished if the loan goes into default or into collections. Legal implications, such as wage garnishment, can have serious negative effects on a credit profile and can take years to recover from.”

Protection strategies for co-signers

If you’re thinking about becoming a co-signer, consider how trustworthy the primary borrower is. You may want to ask them to show you their budget; that way, you can confirm that they can afford the loan payments.

Also, ensure you can log in to the lender's website to view the loan payments. You may not be notified by the lender that payments have been missed until it has negatively affected your credit. You can also ask that the lender send monthly loan statements to you as well as to the primary borrower.

Finally, be prepared to step in and make payments if needed. You are guaranteeing the loan, so you’re legally responsible for it. Make sure that your day-to-day finances won’t be affected if you wind up having to make payments for the primary borrower.

Comparing personal loan options with a co-signer

When comparing personal loans, the borrower and the co-signer should discuss the following:

• Loan amount: Borrow only what you need. A larger loan means higher monthly payments and more interest over time.
• Interest rate: Some lenders base your rate on the higher of the two credit scores, which could lower your interest rate. The rate you receive plays a major role in the total cost of the loan.
• Loan term: A longer loan term lowers monthly payments but increases total interest costs. Make sure the timeline works for both you and your co-signer.
• Fees: Watch for origination fees and prepayment penalties. Origination fees typically range from 1% to 10% of the loan amount and may be deducted from the loan or paid upfront.