Backed Review: Co-Signers Make Personal Loans Cheaper

Backed wants to give low-interest loans to millennials with unestablished credit.

The online lender uses a simple co-signer model. It allows someone with stellar credit (typically a parent or sibling) to “back” a borrower. You can qualify for a personal loan without a backer, but the addition of one will reduce your interest rate — the company says by as much as 41%.

Backed’s starting interest rate is the lowest NerdWallet has seen for borrowers who have well-qualified co-signers. But the lender currently operates only in a handful of states: Arizona, Florida, New Jersey, New York and West Virginia.

Do you qualify?

If you have a co-signer, there are no minimum requirements for your own credit score, but the co-signer’s must be 720 or above, confirmed with a hard credit check when the loan is finalized.

If you don’t have a co-signer, you must have:

• A minimum credit score of 660.
• Minimum annual income of $18,000.
• At least six months of credit history.

Having a co-signer can reduce your interest rate, but Backed also rewards borrowers for sharing more information about themselves. Here’s how it works:

• Applicants provide basic data about loan purpose, income, debts and education level to see if they qualify for a loan.
• Backed assigns borrowers a grade and gives them an initial quote.
• Borrowers can choose to accept their quote or provide more information about themselves to reduce their APR. Adding a Facebook account helps the lender verify identity; a LinkedIn account backs up education and employment history; and linking a bank account provides detailed information about cash flow.
• Backed uses an algorithm to calculate risk, then reduces the borrower’s interest rate and origination fee accordingly.

Borrowers typically add a co-signer when they apply, but they also can add one after receiving a loan from the company. The old loan is then closed and a new one created, the lender says.

Right now borrowers can only add one co-signer, but that may change as the company grows, says CEO Tal Yatsiv. The New York-based lender launched in late 2015.

» COMPARE: See how Backed stacks up to other personal loan companies

What makes Backed different

Backed’s starting APR of 2.9% (only for well-qualified borrowers and backers) is the lowest among the online lenders NerdWallet has reviewed.

The lender also tries to reduce the traditional risks involved in co-signing a loan, giving backers an early warning about missed loan payments.

Traditionally, it’s up to the co-signer to monitor the borrower’s payments, because lenders are not required to keep them in the loop. If the loan goes into default, the co-signer’s credit is dinged along with the borrower’s. Depending on state law, lenders can also collect debt from the co-signer without first trying to collect from the borrower, according to the Federal Trade Commission.

With a Backed loan, the co-signer receives automatic email notifications of all regular payments. If the borrower misses a payment, the lender immediately contacts the co-signer (via text message or phone call) and allows a 15-day grace period to make the loan current.

Still, “while the notification feature allays a lot of concerns, you should never co-sign anything unless you can afford to take over the payments,” advises NerdWallet personal finance columnist Liz Weston.

Backed also offers a degree of flexibility. Borrowers who need to adjust their due date can do so by contacting the company. Those who have made on-time payments for a year may also be able to lower their interest rate by reaching out to the company.

Backed’s loan terms and limits are comparable to those of other online personal lenders. Here’s what else you need to know before applying for a Backed personal loan:

Backed’s credit standards

• Minimum credit score required: 660 for borrower without co-signer; 720 for co-signer.
• Minimum gross income required: None for co-signed loans; $18,000 for loans without a co-signer.
• Minimum credit history: None for co-signed loans; six months for those without a co-signer.
• Maximum debt-to-income ratio: Not provided.

Backed’s lending terms

• APR range: 2.9% to 16%.
• Minimum loan amount: $3,000.
• Maximum loan amount: $25,000.
• Limitations: Available only in Arizona, Florida, New Jersey, New York and West Virginia.
• Loan term: 1 year to 3 years.
• Time to receive funds: 2 to 4 business days.

Backed’s fees and penalties

• Origination fee: 0.8% to 2% depending on borrower’s grade.
• Prepayment fee: None.
• Late fees: $20 after 15-day grace period.
• Personal-check processing fees: $10.
• Other fees: $15 unsuccessful payment fee.

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Backed review: The bottom line

Backed can be a good option if you are new to credit or have poor credit and want to improve your score. Your co-signer is still on the hook if you miss payments or default, but Backed’s notification system and grace period are designed to give you both breathing room and a chance to protect your credit.

If you don’t need the credit-building potential of this loan, it may be better to simply ask your family member or friend for an interest-free loan. You should have a workable plan to pay the person back.

If you’re mostly looking to build credit, a secured credit card or credit-builder loan don’t require a co-signer.

If you’re borrowing to consolidate debt, remember that a personal loan makes sense only if it gives you a lower interest rate than your current debt or helps you pay off your debt faster. Always have a plan of action to get out of debt before you borrow money to consolidate.

More from NerdWallet
Personal loans: Compare best rates & lenders
The best personal loans for bad credit
Co-signing loans with fair credit: What you need to know

Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay