Let’s face it, having bad credit isn’t fun. It limits you in many ways. Bad credit affects your car insurance, housing, and even job.
It’s not always your fault, either. You could be recently divorced and one of your parting gifts was your former spouse’s debt. Or worse, a cybercriminal stole your identity.
If you fall into the latter category, you’re not alone. The FTC reports they received 2.7 million identity theft and fraud complaints in 2017. It cost consumers close to $905 million.
Regardless of why your credit isn’t where you want it to be, it takes time for it to get there. Sometimes, you can’t wait for that 700 to show up on your credit score. You need housing, a car, or some cash.
Believe it or not, you have options. A cosigner is one of the more popular ones.
If your credit is less than stellar, but you need to take out a loan, our guide below can help. We’re explaining everything you need to know about getting a personal loan with a cosigner.
Let’s Talk About Your Credit
Before you look into any loan product, it’s important that you get a copy of your credit score.
Oftentimes, someone thinks their score is higher than it really is. Or, vice versa — it’s higher than they assume it to be. That’s why you should nip it in the bud and get a copy for yourself.
Most lenders in the U.S. use a FICO Score to determine credit. This is the Fair Issac Corporation. They provide software that calculates credit scores.
FICO bases their system off a set number of factors:
- Amounts owed (30%)
- Credit mix (10%)
- Length of credit history (15%)
- New credit (10%)
- Payment history (35%)
From these factors, FICO puts a numeric value on your credit-worthiness. These numbers determine if your credit is good or bad.
The following is the guideline for FICO Scores:
- Very poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
A recent report suggests 56% of Americans have poor or subprime credit. There is no shame in having credit that is “fair” or “very poor.”
As we mentioned, there are many circumstances in life that happen beyond our control. Some of them negatively affect our credit score.
Why You Would Need a Cosigner
Most lenders — whether it’s for a car, house, or personal loan — want to see a high credit score. The higher the score, the less risk the person is of defaulting on the loan.
Or, so the theory goes.
With the minority of the country having a “good” score, these lenders wouldn’t be in business if they only catered to the 670 and up crowd.
So, there are other options that allow people with bad credit to get said loans. One of the most popular ways is through a cosigner.
A cosigner is someone whose credit is usually at least “very good.” The lender is more open to approving the initial loan if there’s someone attached to the loan who is “less risky.”
But, you may also need a cosigner if your debt-to-income ratio is off. You could also need one if your income is below the lender’s standards.
If your credit is good and you pay your bills on time, it may not be enough if you don’t have a lot left every month. You can lean on a cosigner’s income to bolster yours.
The Cosigner Isn’t a Co-Borrower
Cosigner and co-borrower are often confused. A cosigner is someone whose credit you lean on to get approved for a loan. You have enough money to repay the loan but your credit isn’t strong enough for the lender to grant you approval.
A co-borrower is someone who usually enters the picture for financial reasons. For example — a couple buying a home. A mortgage lender looks at both spouses’ combined income when determining the amount of the home they’ll approve.
One spouse may only get approved for a $150,000 house. The other, $100,000. But combined, the lender could approve them much more than they would on their own.
In other words, it makes it look to the lender that there are more funds available to pay the mortgage every month. Each borrower has an equal stake in the loan and usually the collateral.
A cosigner usually doesn’t have any stake in the loan or collateral — aside from paying it back should you default.
Getting a Personal Loan with a Cosigner
Before we get into the positives and negatives of using a cosigner, there are some things you need to consider.
First, it’s important that you only reach out to someone you trust. This should be someone you know well, has a steady income, and is responsible. It can be a relative, friend, or partner.
Second, having a cosigner affects the timeline of the loan process. The lender now has to run the cosigner’s information through the same process it ran yours. This can add a day or more onto the process.
But what about the pros and cons? We’re going over them below.
The biggest pro is that your personal loan has a better chance of getting approved.
You may also get a lower interest rate than you would have on your own. Lenders usually give “riskier” borrowers a higher interest rate. But if a cosigner makes you “less risky,” they’re more apt to lower the rate.
You could see your own credit score improve. If you have no or poor credit, having a cosigner means you have a new loan. This is a second chance at improving your score.
Make sure you pay your loan on time every month. Over time, you may be able to refinance your loan on your own without the help of a cosigner.
If you do pay your loan on time, your cosigner’s credit score may also improve.
So far, you may be thinking that everything sounds great! How could having a cosigner possibly be bad?
It’s not. Not for you, at least. But the cosigner is taking on a potential debt as well.
If you fail to pay on the loan, the lender will come after your cosigner for payment. This could affect your relationship with them.
If you’re late with your payments — even once or twice — it could lower your cosigner’s credit score.
Their chances of getting approved for their own loan could get affected by yours. Even having their name on your loan can show another lender their debt-to-income ratio is too high.
Don’t Let Your Bad Credit Hold You Back
Regardless of why your credit isn’t where you want it to be, you’re not alone. You also have options.
Many creative lenders will allow you to take out a personal loan, despite your bad credit. Others may only approve your personal loan with a cosigner.
Make sure you do what’s right for you and your situation. We can help.
We offer plenty of information on bad credit loans of all types. Whether it’s a personal loan or a payday advance, we have the knowledge you need. Best of all, we’re sharing it with you!
Read more on our bad credit blog, to see what types of loans are available to you.