Personal Loan with a Cosigner
Posted by Frank Gogol
The strict requirements of many lenders can make qualifying for a loan exceedingly difficult, especially for those without a strong financial profile or a good credit score. Lenders reduce risk however they can to improve their chances of recouping a loan, and one way that they do this is by requiring a cosigner.
Including a cosigner can strengthen a loan application and improve chances of acceptance, but requiring a cosigner also excludes many applicants who are independent and don’t have financially stable friends or family that they can turn to. This article provides a detailed breakdown of how cosigning works and what influence cosigners can have on loan applications.
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What is a Cosigner?
A cosigner is someone who leverages their financial profile and credit as a guarantee for the lender on behalf of a borrower, taking on responsibility for repaying the loan if the borrower his or herself is unable. Cosigners are used not only on loan applications, though, but for many financial transactions that involve substantial sums, like mortgages or rental applications. In any situation where a lender or renter may be unsatisfied with the financial profile of the applicant, or if they simply seek to provide another avenue for recouping the loan, they may require a cosigner.
How Can a Cosigner Help?
Even when a cosigner isn’t required to qualify for a loan, including one on an application can still be helpful. The rate that an applicant gets when they take out a loan is determined by factors like the strength of their financial profile, credit score, and income. Since these factors reflect the degree of risk the lender takes on, and the rates offered are themselves a reflection of this risk, by including a cosigner with good finances you reduce risk and thus often obtain better rates.
When you apply for a personal loan with cosigner you essentially adopt the cosigner’s financial profile in the eyes of the lender. So if you have a close friend or relative with a strong financial profile willing to take on the responsibility, doing so can open up a range of options that may have otherwise been inaccessible.
The other side of this, however, is that many applicants are independent and don’t have a close friend or relation with a strong enough financial profile to enlist as a cosigner. This renders these lenders all but inaccessible, though there are lenders that do not require a cosigner.
Cosigner vs. Co-borrower
While a cosigner functions as a sort of backup plan for a lender, a co-borrower shares equal status with the borrower and receives a share of the disbursed funds. Co-borrowers are also responsible for making payments on the loan from the beginning, whereas a cosigner only must pay off the loan if the borrower defaults.
This is why co-borrower are often referred to as “joint applicants,” they are on the same footing and hold the same responsibilities as the primary applicant regarding disbursement and repayment.
Is a Cosigner the Right Option?
Whether or not a cosigner is suitable depends on the applicant’s financial history, as well as on the terms and rates they want from a loan. If you can get a decent rate on the strength of your credit score and financial history and can count on your ability to make payments reliably in the future, then a cosigner is likely unnecessary. However, if you can apply for an unsecured loan with a cosigner and you may not qualify for the best rates on your own, utilizing a cosigner can generate significant savings by getting you a lower interest rate.
If a cosigner is required to apply, or if it’s required for applicants who cannot meet certain qualifications, then you must either find a cosigner or find a lender that has qualifications that you can meet.
Also, it’s important if you are going to cosign for someone that you understand that you may be held financially responsible down the line. Discuss first with the primary applicant so you can get an idea of the consistency of their income and how much you can rely on them to meet their obligations.
What if I Don’t Have a Cosigner?
Some lenders recognize that not all applicants have a potential cosigner with a good enough credit score and financial history to qualify, and provide other means of qualifying for a loan. Unlike online loans with a cosigner, lenders like Stilt take peripheral factors into account so you don’t need a cosigner to qualify. These lenders consider merit-based factors like future earning potential instead.
Otherwise, your best option, if you don’t have a cosigner, is to build a financial and credit history over time that will qualify you for loans that don’t require a cosigner. Since the requirements for such loans are typically fairly high, this is something that must be done over the course of months or even years.
A cosigner can be the factor that clinches more favorable loan rates for you, or the factor that prevents you from getting a loan. If you have someone you can employ as a cosigner, figure out if it’s necessary to qualify for the loan you want and discuss the responsibilities involved with the cosigner. If utilizing a cosigner is not an option, find lenders that don’t require one and work on building your financial profile and credit score. Ultimately, a cosigner is not strictly necessary to get a loan, but having one will likely make qualifying easier and help you get a better rate.