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.
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.
In this article:
Co-signed loans from banks and credit unions
Online lenders that allow co-signers
Is a co-signer the right option?
Co-signer or co-borrower?
It’s helpful to understand the difference between co-signers and co-borrowers.
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 score 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.
Vouch and Backed have business models built around co-signed loans.
Vouch lets a borrower add multiple co-signers, and it reduces the interest rate and fees on the loan according to the number and quality of co-signers. Co-signers can back the loan for amounts starting from $100.
Backed lets borrowers with thin credit files or a low credit score add one co-signer to get a lower interest rate. The lender tries to minimize the risks of co-signing a loan, notifying co-signers of missed payments and granting a grace period to pay it off before it damages anyone’s credit.
• APR: 10.68%-29.99%
• Loan amount: $2,000-$15,000
• Loan terms: 1-3 years
• Minimum credit score: 600 for borrower, 580 for sponsor
• Time to funding: Next day
• Fees: Origination fee 2% of loan; late fee 5% of payment or $15, whichever is greater
• APR: 2.9%-16%
• Loan amount: $3,000-$25,000
• Loan terms: 1-3 years
• Minimum credit score: 660 without co-signer; none with co-signer, but co-signer needs 720
• Time to funding: 2-4 business days
• Fees: Origination fee 0.8% to 2% of loan; late fee $20 after 15-day grace period; personal check fee $10
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 also allows joint applications. The marketplace lender has a debt-to-income ratio requirement of 35% for joint applications, which is lower than the 40% limit for individual borrowers.
OneMain Financial already lends to those with poor credit, but it also allows joint applications. The lender has no minimum credit score requirement and offers same-day funding.
• APR: Start at 2.99% (boat, RV) to 4.99% (credit card and debt consolidation), ranging up to 14.49%
• Loan amount: $5,000-$100,000
• Loan terms: 2-7 years
• Minimum credit score: 680
• Time to funding: Same day, with option of up to 30 days from approval
• Fees: None
• APR: 5.99%-35.96% (4.99% with excellent credit)
• Loan amount: $1,000-$40,000
• Loan terms: 3 or 5 years
• Minimum credit score: 600
• Time to funding: Usually 7 days
• Fees: Origination fee 1.11% to 5% of loan amount; fees for late payment, unsuccessful payment and personal check use
• APR: 12.99%-35.99%
• Loan amount: $1,500-$15,000
• Loan terms: 3-5 years
• Minimum credit score: None
• Time to funding: From same day to up to three days
• Fees: Origination and late fees, both vary by state
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.
| APR | Monthly payment | Total cost | |
|---|---|---|---|
| Without co-signer | 19% | $504 | $12,096 |
| With co-signer | 8% | $452 | $10,848 |
The borrower could save more than $1,200 over the life of the loan with the addition of a co-signer.
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 payments to the credit bureaus, which has an impact on both your credit and, if you default, on the co-signer’s.
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Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay.
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