Can you have a cosigner on a personal loan

What’s the difference between a co-signer and a co-borrower?

Co-signers and co-borrowers have a similar effect on a personal loan application but different responsibilities for repaying the loan and accessing funds.

Co-signer: A co-signer vouches for someone else’s loan application and agrees to repay it if the borrower doesn’t. The co-signer can’t access the loan proceeds, nor can they see information about the loan, like how much you’ve repaid or if you missed a payment, says Massachusetts-based certified financial planner Therese Nicklas.

Co-borrower: A co-borrower is a partner applicant on a joint personal loan and shares responsibility for repayment. This person has equal access to loan funds and payment information.

When is a co-signer a good idea?

Lenders use information like your credit and income to decide whether you qualify and what your loan amount and annual percentage rate should be. Adding someone with better credit, higher income and low debt to support your application makes a lender more confident that the loan will be repaid.

A co-signer can help if:

• You have bad credit. There are personal loans for bad credit, but few lenders approve applicants with credit scores below 600. If that’s you, a co-applicant with better credit could increase your approval odds.

• You want a larger loan. Lenders offer the largest loans to well-qualified applicants, so including a co-applicant could increase the size of your loan.

• You need a lower rate. Since the APR affects your monthly payments, adding someone to the application could get you a lower rate, meaning a less expensive loan.

How much a co-signer or co-borrower helps depends on factors such as:

• The co-applicant’s credit score.

• Both your credit histories.

• Your combined debt-to-income ratio.

• The lender’s underwriting criteria.

Risks of adding a co-signer

It’s important for you and your co-applicant to understand the risks of co-signing before submitting an application. These can include:

• A hard credit check, which will temporarily lower both of your credit scores.

• Higher debt-to-income ratios for both of you, which could make it harder to access credit during the life of the loan.

• Damage to both of your credit scores if a payment is missed.

• Damage to the relationship, which could be harder to salvage than your credit.

Next steps: Check personal loan rates

Pre-qualify to see if you're approved for a loan on your own and, if so, at what rate. The pre-qualification process doesn’t affect your credit score, and you could find an affordable offer without a co-applicant.

If not, some lenders allow you to add a co-borrower during pre-qualification to give you a more accurate rate estimate. A co-signed option may only be available if you don’t get a loan offer.

If you’re considering cosigning a personal loan to help a loved one, you should be fully prepared to make every single payment on the loan until it's completely paid off. If your finances can't handle that or you simply don't want to take on that responsibility, you shouldn't cosign the loan. The loan is legally yours, too, and you should treat it as such when deciding whether you can afford to take it on.

Keeping that in mind, here are some additional things you should think about if you're deciding whether to sign or not.

Know Your Rights

It's important that you understand what your rights are as a cosigner on a loan. Federal law requires lenders to provide you with a cosigner's notice listing what your obligations are as the cosigner. Here's what that notice will say, according to the Federal Trade Commission:

●      You're being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

●      You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

●      The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, including suing you or garnishing your wages. If this debt is ever in default, that fact may become a part of your credit record.

●      This notice is not the contract that makes you liable for the debt. It’s important to note that the official loan documents are what makes the cosigner legally liable for the personal loan, not the cosigner’s notice listing.

Your state may provide more extensive protections for cosigners. For example, state law may require lenders first attempt to collect payments from the primary borrower before collecting from the cosigner. Or, your state may mandate that lenders inform cosigners when a loan has become delinquent. Make sure you know what your state's laws are and what kind of protection you can (and can't) expect.

Understand The Contract

You may be able to have certain protections included in your contract as well. Take the time to read all the relevant loan documents and make sure you know what agreements you are making with the lender.

Pay attention to whether or not the lender will notify you of late payments. If this isn't included in the contract, ask for it to be included in writing. That way, you won't be in the dark if things start to go south on the loan.

According to the FTC, you may be able to negotiate some of your liability with the lender. For example, you may ask if it's possible for you to only be liable for the principal balance. That way you'll only be responsible for the loan itself, and not any late fees or legal costs the borrower may incur.

Finally, get your own copies of all the important loan documents.

Consider Your Debt-To-Income Ratio

One often overlooked aspect of cosigning a loan is how it can affect your own finances even if everything goes according to plan.

Remember that when you cosign a loan, creditors view that loan as belonging to you. This impacts your debt-to-income ratio, or the portion of your income that’s spent on debt payments.

If the cosigned loan pushes your DTI too high, you may have difficulty getting approved for your own loan, even if the primary borrower has made every single loan payment on time.

If you're considering getting a mortgage in the near future, you'll want to keep your DTI below 50%. If cosigning a loan pushes your DTI past this point, you may want to reconsider.

Be Honest

If you're going to cosign a loan for someone, you'll need to have an open and frank conversation about their finances, your own finances and if they're able to handle the monthly payments.

It can be an awkward discussion, but having a better idea of their financial situation can help you keep tabs and better evaluate your risk. For example, do they have a savings account for emergencies that could cover their monthly payments if necessary, or will they expect you to back them up if they have a budget emergency?

You should also consider asking the borrower for access to the loan account, including getting log-in credentials if the loan information is available online. That way you can check in each month to make sure the loan is still current and payments are still being made in full and on time.

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