Yes, you may be able to get a personal loan with a cosigner. The question is, should you? Before we get into the nitty-gritty of personal loans with co-applicants, let’s first get some things clear.
Personal loans, if you aren’t yet aware, are unsecured loans. That means you don’t need to put up any collateral. Instead, you become qualified for a loan based on your credit history, income, and debt-to-income ratio. Should you default on this type of loan, the lender does not have a right to take your assets in lieu of payment.
So, what is a cosigned personal loan then? Well, we’ve already mentioned that lenders evaluate a borrower’s financial situation which includes income and credit history. This helps them determine a person's ability to repay the loan. That’s why lenders may turn down applicants who have poor credit history, a lack of a steady income, and/or low credit score. For them, these individuals are too risky; there’s a high probability that the lender will be unable to get his money back. Or, in the case of the borrower, the lender may approve the loan but with a high interest rate, something he or she may not be able to afford. A cosigner enables these borrowers to overcome these hurdles.
A cosigner is someone who assumes equal responsibility for the repayment of the loan. That means, should you be unable to make payments on the debt, the cosigner will be the one to make good on the payments. Because of this, a cosigner is typically a person with a good credit score and stable income who is able to make steady payments on the debt despite his or her other financial obligations. With a cosigner, an unqualified borrower may be able to get a personal loan. In addition, the borrower may be able to get better terms.
As we’ve already mentioned, a cosigner gets equal responsibility for the repayment of the debt. However, he or she does not have any rights on how the money will be spent or on any property purchased using the money. A co-borrower, on the other hand, does get these rights along with the responsibility. For example, if you use the money to buy a home, both you and the co-borrower own the home and are liable for the repayment of the entire debt.
Obviously, those with bad credit would benefit greatly from using a co-signer. But are there other situations or circumstances when it makes sense to do this? Yes, actually. We’ve enumerated several below.
If you have never had a credit card or gotten a loan, chances are you have no credit history to speak of. You probably also don’t have a credit score because you lack credit history. And this can make lenders leery of lending you money because they have no financial history to base their decision on. How would they know that you are a financially responsible person if you have no past to speak of? Most lenders will automatically reject your application if you don’t have a credit score or one that is lower than 650, so a bad credit personal loan with a cosigner is a good solution to this problem.
One factor that lenders look at in loan applications is the person’s ability to repay the debt. Which means they will be looking at your work history and the income you generate. If you’re just starting out (e.g., you’ve just recently graduated), you probably don’t have much of an employment history and quite possibly have a low income because you’re the lowest man on the totem pole. Freelancers also have this problem since their income is fluctuating and not steady which is what lenders prefer. A cosigner can assure a lender that the debt will be repaid in full despite the low or unstable income of the borrower.
Your debt-to-income ratio or DTI measures how much debt you have divided by how much money you make before taxes. Your DTI is a factor used by lenders to help determine your ability to repay. A high DTI (above 40 percent) can mean that you might miss out on some payments or maybe even default on the loan because you have other debts to pay off as well.
One or a combination of these factors could result in a rejection of your application, or you can get approved but with a very high interest rate. With a cosigner, your chances of getting approved for the loan is much higher as long as he or she has good credit.
As we’ve mentioned before, if you apply for a personal loan with a cosigner, you’re more likely to qualify for the loan that you otherwise wouldn’t have gotten on your own due to your poor credit history, lack of steady income, etc. Doing so also helps you get a lower interest rate. In addition to that, you’ll also receive more offers from lenders because you are now less of a financial risk. With more offers on the table, you are more likely to find a loan with terms more suited to your financial health.
If you have bad credit, a personal loan with a cosigner can you access cash that you can use to pay off high-interest debt, medical emergencies, home repair, etc.
The best thing about this type of loan is that you can use it to improve your credit history. By making on-time payments on the loan (which should be easier with a lower interest rate), you can slowly build your credit rating, which should improve your chances of borrowing in the future.
As you already know, lenders use a person’s creditworthiness and other financial information when evaluating an application. Since you lack one or more of their qualifying factors, your cosigner should be someone who will be able to provide the qualities they seek in a borrower. This means you need someone who has a good or excellent credit history, several years of credit history, a steady income, good employment history, and a low debt-to-income ratio. In short, you want a cosigner who will look attractive and responsible to the lender. In addition, you should know your cosigner well because you will be asking him or her to put their good name on the line for you. If both of you are unable to pay off the debt, both of your credit histories will be negatively affected.
The first thing you need to do is to look for lenders who offer cosigned personal loans such as Citibank, Wells Fargo, and FreedomPlus. Next, you have to look for a cosigner who meets the requirements we mentioned above. Anyone can be a cosigner, of course. But it’s best to get someone who is invested in your life and wants to help you become successful as well as financially independent. It’s also recommended that you get someone who understands your financial situation well and will have no problem backing you up in case you need help making payments.
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