Co-signers and Personal Loans: What You Need to Know

Kat Tretina

Updated On: May 14, 2023  •  3 Minute Read

Loans

If you have high-interest credit card debt or need money to pay for an unexpected car repair, taking out a personal loan can be a smart strategy. However, it can be difficult to qualify for a loan — and to score a low interest rate — if your credit score isn’t excellent.

However, there is one way around that problem: adding a co-signer to your personal loan application. If you’re thinking about using a co-signer, here’s what you need to know before submitting your loan application.

What is a co-signer?

A co-signer is usually a friend or relative who has good or excellent credit and a stable income who agrees to apply for a loan with you. When a lender reviews your application, they’ll look at both your information and your co-signer’s to determine whether or not to issue you a loan. Applying for a personal loan with a co-signer There are two core benefits to applying for a personal loan with a co-signer:

1. You have a better chance of being approved for a loan

A co-signer acts as a guarantor on the loan. If you fall behind on your payments, the co-signer will have to make them, instead. Having a co-signer on your application reduces the lender’s risk, making them more likely to offer you a loan.

If you can’t qualify for a loan on your own because your credit score is too low or because of insufficient income, adding a co-signer to your application can help you get the money you need.

2. You may be able to qualify for a lower interest rate

If you have less-than-stellar credit, you may still be able to qualify for a personal loan. However, it may have a high interest rate. Over the length of your loan’s repayment, you could end up paying hundreds or even thousands more in interest charges.

By adding a co-signer, you could save money. Having a co-signer who has excellent credit can help you qualify for a lower interest rate than you could get on your own, reducing how much you’ll pay in interest fees.

For example, let’s say you took out a personal loan for $20,000 on your own. You qualified for a five-year term, and received a 10% interest rate. Over the length of your repayment, you’d repay a total of $25,496. Interest fees would cost you over $5,400.

But let’s say you had a co-signer with excellent credit. Thanks to their help, you could qualify for a $20,000 loan with a five-year term at just 7% interest. Over the course of five years, you’d repay just $23,761. Having a co-signer would allow you to save over $1,700.

Downsides to having a co-signer

While adding a co-signer to your application can be advantageous, there are some drawbacks to consider:

1. Your co-signer is responsible for payments

If you can’t afford your payments, the lender will go after your co-signer for them, instead. If the account continues to go unpaid, your co-signer’s credit can be ruined, and it can affect their ability to qualify for other forms of credit.

2. Your relationship could be strained

Because of the impact missed payments can have on your co-signers credit, your relationship with that person could be strained. They co-signer may resent you if you can’t keep up with the payments, and it can be a difficult situation to salvage.

3. Co-signer releases aren’t common

Co-signer releases — where the lender removes the co-signer from the loan — aren’t common with personal loans. Even if you can afford the payments on your own, you may not be able to remove the co-signer from the loan.

Applying for a personal loan

Now that you know how applying for a personal loan with a co-signer works, you can make an informed decision about whether or not having a co-signer makes sense for you. If you decide to move forward with a personal loan, make sure you compare offers from multiple lenders to ensure you get the best rates.