If you need to borrow money and your financial situation isn’t the strongest, you might be able to boost your odds of approval by seeking out a co-signer. And on the flip side, if you have good credit and a strong income, it’s possible that someone might come to you and ask you to co-sign for their loan.
The truth is that co-signing on a loan can be a win-win for both parties, but it can also result in broken relationships, destroyed credit and financial hardships for the borrower and the co-signer. In order to forge a successful co-signer relationship, you need to know exactly what a co-signer is, how the arrangement works and how to dodge potential pitfalls.
What Is a Co-signer?
A co-signer is a secondary person who agrees to pay back a loan in case the primary borrower defaults (i.e., doesn’t pay it back). When you co-sign on a loan, the loan is recorded on both your credit report and on the main borrower’s credit report. As long as they make on-time payments, you’ll get the benefit of those marks too. However, if the borrower misses a payment or just stops paying on the loan entirely, you’ll be on the hook for the loan. And if you fail to pay up, the lender can actually take you to court for the money.
If you’re looking to borrow money, lenders generally require you to get a co-signer if you have bad credit or no credit, limited income or something else that makes you a lending risk. This is commonly the case for young people who are just starting to build their finances, and who may not have any credit history yet. For example, roughly 90% of all private student loans were made with a co-signer during the 2019/2020 school year according to MeasureOne, a data analytics company.
However, not all lenders accept co-signers, so if you have a limited credit history and think you’ll need help qualifying, it’s best to confirm with the lender before applying.
When a Co-signer Makes Sense
Using a co-signer on your loan can make sense in a lot of cases:
- You have bad credit
- You don’t have much income
- You’re young and you don’t yet have credit in your name
Using a co-signer can help you overcome these barriers so you can get approved for a loan. You may even be able to get lower interest rates if you and your co-signer are approved.
But in order for this setup to work, you’ll need to have a few things in place:
- Trust between the borrower and the co-signer. The borrower is asking a lot of the co-signer, and so you’ll want to make sure you trust each other.
- The co-signer needs to have a good credit score. If the co-signer’s credit is the same as yours—or worse—they may not be approved to co-sign on the loan.
- The co-signer needs to be able to pay the loan on their own. If the borrower defaults on the loan, a co-signer should be able to comfortably afford the payments on their own.
Co-signer vs. Co-borrower
A co-signer is someone who agrees to be a backup for the loan payments. A co-borrower, on the other hand, is someone who’s equally liable for each payment (i.e., before it’s past-due), and who typically also shares ownership rights for whatever the loan was for.
For example, a husband-and-wife team may be co-borrowers on a loan for a house and both listed on the title. This means they own the home equally, and are both responsible for making payments each month.
But if a parent co-signs on their kid’s car loan, they aren’t first in line to make the payments. The lender only contacts them for payment if their kid doesn’t pay up. They also don’t have any ownership rights in the car—even though they’re on the hook to pay for it.
How to Find a Co-signer
Just about anyone can be a co-signer. But since you both need to trust each other, it’s more common to use friends and family with whom you already have an existing and healthy relationship.
If you need a co-signer, make sure you consider who to ask carefully. This is a big ask of them. You’ll need to be open when discussing your financial situation, and they’ll need to be comfortable with disclosing their financial situation, too.
It’s entirely possible that your first choice for co-signer may not be able to comfortably take on the financial responsibilities. If that’s the case, you need to be able to let them off the hook gracefully. Even if they are financially able to co-sign for you, they may not want to take the risk, and you need to be understanding of that.
In fact, it’s entirely possible that you may not have anyone close enough to you who could be a good co-signer. In this case, it may be necessary to consider some popular alternatives to a co-signer arrangement.
Co-signer Alternatives
Not everyone is able to use a co-signer, and that’s OK. But that doesn’t mean you’re out of luck. Here are a few other options to try:
Shopping Around With Other Lenders
The world is full of all types of lenders, some of whom specialize in the types of loan applicants who traditionally need a co-signer. These “bad credit loans” can be a good (if expensive) alternative, but you’ll want to be careful here as there are a lot of shady lenders.
Here are two important things to ask of any bad credit loan lender:
- What are the rates and fees? Avoid short-term payday loans, which typically charge APRs of 400%, compared to the average two-year personal loan at 9.34% APR.
- Do you report to the credit bureaus? This will help you build credit, so you don’t need to rely on these types of lenders in the future.
Use Collateral
You might not have a person who can guarantee your loan, but you might have property. Collateral refers to something you own that you agree to give to the lender in case you default on the loan. If a loan has collateral, it’s called a secured loan. Common secured loans include auto loans, mortgages and even some personal loans.
If your lender allows it, you may be able to qualify by agreeing to use something valuable you own as collateral. But remember, if you put up your car as collateral, for example, and fail to pay the loan, your lender can repossess your car.
Ask Friends and Family
If your friends and family are financially stable and willing to lend you the money but prefer not to co-sign on a loan, consider asking them for the money outright. You could ask for it as a gift, or better yet, a loan that you repay back to them.
If you opt for the loan route, make sure you draft up a legal agreement of your own. This reduces the likelihood that your relationship will sour over time if your co-signer feels like they aren’t getting paid back according to schedule. You don’t want to be that family member they’re always hounding for cash.
Go to a Credit Union
Credit unions are often more willing to work with you than banks or other lenders. Of course, it’s not a free-for-all and you will need to meet their loan requirements. But if you’re having a hard time getting approved elsewhere, it might be worth stopping by a credit union in your area to see if they can help.
The downside is that credit unions have their own membership requirements which you’ll need to meet before you apply.
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