A good credit score and lengthy credit history can give you a low interest rate on a personal loan. But if you don’t have either, a co-signer may be a good option.
Co-signing is common with car loans and student loans, but banks, credit unions and a few online lenders also allow co-signers for personal loans.
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A co-signer with good credit and higher income than yours can increase your chances of qualifying for a loan and get you more favorable terms. The co-signer acts as a form of insurance for the lender, promising to pay the loan amount in case you default.
However, if you miss a payment, you risk hurting both your credit score and that of the co-signer. And you can also ruin the relationship you have with the co-signer.
“No matter how much you trust your relative or friend, never co-sign for a loan that you can’t afford to repay yourself,” says Liz Weston, NerdWallet personal finance columnist.
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Co-signer or co-borrower?
A co-signer is responsible for paying the loan if the borrower defaults and doesn’t typically benefit from the proceeds of the loan. A co-borrower or joint borrower, though, is not only equally responsible for the payments, but also appears on the title to the car or home used as collateral.
Since there is no collateral with unsecured loans (such as personal loans), the terms “co-signer,” “co-borrower” and “joint borrower” are often used interchangeably. You may also see “guarantor,” which is similar to “co-signer.” Check with the lender to understand the rights of both borrower and co-signer.
In every case, the credit of both parties will improve with timely payments or suffer because of missed payments. Lenders aren’t required to keep co-signers in the loop, so it’s usually up to the co-signer to ensure that the borrower is making regular payments.
Co-signed loans from banks and credit unions
Most major banks no longer offer personal loans, but Wells Fargo and Citibank still do. Both banks have the option of adding a co-signer. You also need to be an existing customer to apply, and you must visit a Wells Fargo or Citibank branch to complete the paperwork for the loan.
Credit unions are a good first stop for any type of personal loan, because they have low interest rates and often work with borrowers to make a loan affordable, even if the borrower has bad credit. Most credit unions allow co-signers on unsecured loans (also called signature loans), and they accept online applications. The maximum APR that federal credit unions can charge is 18%.
Online lenders that allow co-signers
Only a handful of online lenders let borrowers add a co-signer.
FreedomPlus gives borrowers a lower interest rate if they add a co-signer with good credit. Forty percent of FreedomPlus borrowers have co-signers, according to the company.
LightStream, a lender that usually gives loans only to those with excellent credit, allows joint applications. The company looks at combined income and debt to check whether borrowers meet its underwriting requirements. But only one of the applicants needs to have excellent credit to qualify for a loan, according to Todd Nelson, LightStream’s director of business development.
Lending Club, a large online lender, allows joint applications. The marketplace lender requires a combined debt-to-income ratio of 35% for joint applications. One borrower must have a minimum score of 600 or above, while the second borrower can have a credit score as low as 540.
OneMain Financial and Mariner Finance already lend to those with poor credit, but also allow joint applications. OneMain has no minimum credit score requirement and offers same-day funding.
Mariner Finance and its affiliate Pioneer Credit Company have branches in more than 20 states and require an in-person visit to complete the loan application process.
How a co-signer can help
For those with bad credit, the benefits of a co-signer are significant. You may qualify for a loan that you wouldn’t get on your own, and your interest rate and origination fee will be lower.
How much will your rate fall? That depends on factors such as:
- The co-signer’s credit score (if it’s a joint application, your score matters, too).
- Both your credit histories.
- Your combined debt-to-income ratio.
- The lender’s underwriting criteria.
For example, consider a borrower with a credit score of 630 and income of $30,000 seeking a two-year, $10,000 loan from an online lender.
The co-signer has a 720 credit score, annual income of $70,000 and low debt.
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Is a co-signer the right option?
There are benefits and risks to co-signing a loan. Whether you’re the borrower or co-signer, understand your responsibilities before you consider a co-signed personal loan.
You can check your interest rate without affecting either your credit or the co-signer’s credit at the time of application, but all lenders conduct a hard credit check on both applicants before they issue the loan. (A hard check affects your credit score.)
These lenders report positive and negative payment information to the credit bureaus, which has an impact on both your credit and, if you default, on the co-signer’s.
Loans presented on this page have a minimum loan length of 1 year, maximum loan length of 7 years, and a maximum APR 36.00%.
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