You went to apply for a loan, positive you would be approved, only to be told by the financial institution that you need a cosigner. That can feel like a blow to your confidence. You may even be wondering what a cosigner is exactly. How do you choose someone to be your cosigner, and more importantly, what can you do if you can’t find a cosigner? Here we layout the basics of needing a cosigner for your loan.
What is a Cosigner?
A cosigner on a loan means that if you default on your payments the person who cosigned on the loan with you, pledges to take responsibility to make the loan payments on your behalf. They sign all the same loan paperwork you do and will be held accountable for the loan, just as you are. This is basically a safe-guard for the financial institution that the loan will not default.
It’s important to note that if you do not make the loan payments on-time both you and your cosigner’s credit scores will suffer for it. So asking someone to be your cosigner is not a small request to make of someone.
Generally, a cosigner is only needed when your credit score or income may not be strong enough to meet a financial institution’s underwriting guidelines. If you have a stronger credit score, typically 650 and above, along with sufficient income to cover the loan payment, it’s likely you will not need a co-signer.
Being asked to provide a cosigner is not a bad thing. There are benefits to having a cosigner on a loan. Having a cosigner can help you obtain loan terms that you may not have been able to be approved for on your own. For example, a strong cosigner can help you obtain a better interest rate or term for the loan.
For example: Let’s say you’re credit score is 590, you’re interest rate could be anywhere from 10-15% for your loan. If you add a co-signer with a credit score of 720, then you’re interest rate could instead be anywhere from 5-7%. That's a lot of savings.
In some cases, you may even be able to borrow more, depending on the strength of your cosigner. If you are asked by your financial institution to provide a cosigner for your debt consolidation loan, that is not necessarily a bad thing. Just make sure you choose a reliable co-signer.
How to Choose a Reliable Cosigner
The purpose of a cosigner it to make your loan less risky for the financial institution you’re choosing to work with. So, it is important to keep two key things in mind when looking for your cosigner.
- Their income level would need to be sufficient enough to cover the loan payments should you be unable to make them.
- Their credit score needs to be above 650 for your lender to consider them as a reliable cosigner in most cases.
When asking someone to be your cosigner it’s best to ask someone you trust and who trusts you, likely it would be a family member or close friend. Don’t be surprised if people are hesitant to cosign for you, it is going to be up to you to convince them that you can be trusted to make the payments on time. You will need to be upfront and honest with them about the following points:
- What you need to the loan for
- Why you need a cosigner in the first place
- How you plan to make on-time payments every month
- Acknowledge that you understand the risk they are taking for you
The more detailed information about your situation and the loan you can provide to your potential cosigner the more likely they may be willing to help you. Don’t be discouraged if everyone on your list of potential cosigners decline to help you, again this is no small request you’re making. There are additional options to try to get approved for your loan even if you can’t find a cosigner.
What To Do If You Can’t Find a Cosigner For Your Loan:
Finding a cosigner for your loan is not an easy task. Even if someone is financial capable of being a cosigner it doesn’t mean they are willing to put their credit score on the line for you. So, what options do you have if you can’t find a cosigner for your loan? Luckily, there are a few things you can try:
- If you are looking for an unsecured loan, you could offer to pledge collateral, such as your car or a recreational vehicle, instead of providing a cosigner. However, keep in mind if you are unable to make payments, you risk losing the asset you pledged as collateral.
- You can look for additional sources of income, meaning you may need to get a second job. Or provide proof of additional regular income you receive such as alimony or social security income.
- Work on paying down your debt to lower the total amount of the loan you are requesting. This may improve your credit score in some cases, making it more likely for you to be able to get your loan without a cosigner.
- Ask if they are willing to extend to you a smaller loan amount, rather than all of it. Depending upon the lender, some maybe willing to offer you a smaller loan without a cosigner. This may require you to provide a larger down payment depending upon what you needed the loan for.
- If one lender turns you down, see if another is willing to help you out. Not all lending institutions have the same guidelines for extending credit. Credit unions, for example, are often more flexible than a bank when it comes to lending to those with lower credit scores.
To Summarize the Basics of Needing a Cosigner:
Being asked by your financial institution to provide a cosigner is actually better than being flat out denied. When a financial institution is asking for a cosigner it simply means your credit score and/or income need to be higher to qualify for a loan. So, the person you ask to be a cosigner should have both a higher credit score and higher income than you do to make them a reliable cosigner. If you cannot find a cosigner for your loan, you need to find an alternative way to raise your credit score or increase your income in order to qualify for your loan.
Want more information? Listen to episode 48 of our Good Money Moves podcast that covers what you need to know about cosigning on loans.