Whether you want to pay off high interest credit card debt, finance a purchase, or get financial help for a home renovation, personal loans can be an affordable and flexible way to get a lump some of money -- fast. Although most consumers can qualify for several personal loan options, you might have a hard time getting the amount you need or qualifying for the best personal loan rates if you have a limited or poor credit history. Applying for a personal loan with a cosigner, however, can help you bridge the gap between your credit history and the lender's requirements.
How to Apply for a Personal Loan With a Cosigner
If you're in the market for a personal loan but lack the credit history or a high enough credit score to qualify for one, then you might want to consider applying with the help of a cosigner. Most lenders allow borrowers and cosigners to quickly apply for personal loans online. Follow these steps to find loan options and apply for a personal loan online with a cosigner.
1. Comparison Shop
Before you start the loan application process, determine why you need the loan and whether a personal loan really is the right loan option for you. Personal loans come in a variety of forms, but most of them are loans with terms of five years or less with a fixed interest rate and fixed monthly payments. These loans can range from a few thousand to tens of thousands of dollars, depending on the reason for the loan and your financial circumstances.
Related: 5 Signs You Need to Get a Personal Loan
Shop around before submitting a formal application for a personal loan, recommended Joseph Hogue, a Chartered Financial Analyst and the owner of PeerFinance101. "Start with personal loans at a bank or credit union," he said. "These may be able to offer lower rates."
Most traditional and online lenders will verify your credit with a soft inquiry first, according to Hogue. "This will help estimate your rate but doesn't go on your credit report, so it won't affect your score," he said.
As you look for personal loan options, make sure you distinguish between traditional personal loans and payday loans, which are short-term loans with high interest rates. Payday loans, or "no credit check" loans, are more like cash advance loans than personal loans. Because they typically have higher interest rates and shorter terms than traditional personal loans, they are usually a much more expensive option for borrowers.
2. Get Your Documents in Order
It's not uncommon for personal loan companies and financial institutions to ask a cosigner for additional paperwork following a personal loan application. Many lenders will ask for proof of income, like pay stubs and bank statements, and some might ask for documents like previous years' tax returns.
Application requirements and definitions, such as what is considered income, can vary from bank to bank. For example, Capital One has specific rules for classifying capital gains or retirement account distributions as income, and TD Bank usually asks applicants to list an employment history.
As you shop for a loan, look at the kinds of requirements lenders have. Have your information and your cosigner's information on hand so that you'll be prepared when you select a loan and fill out the application either online or in person.
3. Select a Lender and Fill Out an Application
Once you've shopped around for a lender that meets your needs, it's time to make a decision. Make sure you find the best rate you qualify for with terms that are acceptable to both you and your cosigner. Choose a lender "that doesn't charge an origination fee and make sure the loan doesn't have a prepayment penalty so you can pay it off early and save on interest," recommended Hogue.
The personal loan approval process varies from a few hours to more than a week depending on the loan terms and lender. Find out how long the process takes with the lender you've selected so that you can plan your budget accordingly.
What is a cosigner?
Not all cosigners are created equal. Generally, a cosigner is someone who signs your loan application as the party responsible for your payments if you default. Review your lender's information to make sure you and your cosigner understand your individual obligations. Here are three common types of personal loan cosigners:
Co-maker. The terms cosigner and co-maker can be used interchangeably. The borrower and the co-maker are equally responsible for the repayment -- the co-maker's signature guarantees the loan will be repaid.
Joint applicant. A joint applicant not only shares in the responsibility of paying off the loan debt but also receives the loan with the primary applicant. A cosigner will typically not receive any portion of the loan and will only serve to cover the payments if the primary person on the loan fails to make them.
Co-borrower. A co-borrower is a cosigner who is an equal party on the loan application. This type of cosigner is common for mortgage loans. Whereas a cosigner only takes responsibility for a loan if the primary borrower fails to make payments, a co-borrower has ownership in the property the loan is used to pay for, such as a house.
How Having a Cosigner Affects the Loan Process
Once you have a cosigner on your personal loan, the lender will want to get as much information as possible on your cosigner. "The applicant's credit score and history really doesn't matter anymore because the bank knows that the cosigner is responsible for the loan," said Hogue.
Here's what to expect once you add a cosigner to your personal loan application:
More paperwork. Adding another person to your personal loan means there is more paperwork involved. In addition to providing proof of income and bank statements, "the bank will have an additional form for the cosigner to fill out, acknowledging their responsibility for the loan if the applicant doesn't make payments," said Hogue.
A lower interest rate. A personal loan is usually unsecured, meaning it isn't backed by an asset, like a house for a mortgage or a car for an auto loan. Depending on your creditworthiness, the low end of personal loan interest rates starts at around 10 percent and can go up to around 35 percent.
Your interest rate largely depends on your credit history, but rates can also vary depending on which financial institution you use. You might be able to qualify for lower personal loan rates through credit unions or online and peer-to-peer lenders like Lending Club and Prosper, but having a cosigner for a bank or credit union loan could potentially lower your rate enough to make that the more attractive loan option.
Related: The 10 Best Credit Unions Anyone Can Join
Why You Might Need a Cosigner for a Personal Loan
You might feel uncomfortable asking someone to cosign your loan but having a cosigner could help you qualify for a lower interest rate or a higher loan amount. "Getting a cosigner can be a little embarrassing, but we've all been there," said Hogue.
By getting over your awkward feelings about asking someone to be your cosigner, you could potentially save thousands of dollars over the life of the loan. For example, if you qualify for a personal loan with a 30 percent interest rate, but using a cosigner gets you in a 24 percent rate, you could save $2,400 on a four-year, $10,000 loan.
In addition to saving money, here are some other reasons you might want to consider getting a cosigner for your personal loan:
Your credit score is too low. The first thing a lender looks at when considering your application for a personal loan is your credit score. If you have less-than-stellar credit, you might not be able to qualify for a personal loan. "For borrowers with lower credit scores, getting a cosigner could help push them over into approval," said Hogue.
Related: What Credit Score Is Needed for a Personal Loan?
You have no credit history. Alternately, you might not have a bad credit score but instead have a limited credit history or no credit history at all. If you've never taken out a loan -- like a student loan or car loan -- or you've never used a credit card, then you might not have enough of a credit history for the lender to consider. Getting a cosigner with longer credit history can help you get approved for your personal loan.
Your income is too new. If you just started a new job or graduated college, you might not have enough income history to qualify for a personal loan. Sure, you're making money now, but sometimes banks want to see a longer history of income before they lend you any money. Your cosigner's income history can potentially help you qualify -- just be sure you only borrow as much as you can pay back on your own.
What Your Cosigner Should Know
If you are going to get a cosigner for your personal loan, make sure both of you know what your responsibilities are. "The cosigner should understand that they are going to be responsible for loan payments if the applicant doesn't keep up their end," Hogue said. "The bank may even come after them first for payments since it knows the cosigner has the better credit score and the most to lose by defaulting."
Here are three crucial questions to ask yourself -- and discuss with your cosigner -- before you both sign on the dotted line.
1. What's the payoff plan?
Whether you have a cosigner or not, you should always have a plan to payoff the loan. But if you do have a cosigner, it's particularly important to make a plan together, as your ability to pay the loan off affects your cosigner's credit history.
"Any missed payments or a default on the loan will cause the cosigner's credit score to decrease, just as if it were their own," said Hogue. "On the bright side, since the loan goes on your credit report as well, regular payments will help increase your credit score also," he added.
2. Are you borrowing more than you can afford to pay back?
You and your cosigner should ensure that the monthly loan payment amount does not exceed what you can reasonably pay. Even though having a cosigner can help you qualify for a larger personal loan, Hogue recommended only taking out a limited amount. "Just be honest about the situation and only borrow as much as you need -- and can afford," he said.
3. Can your relationship survive?
Cosigning a loan can affect more than just your credit score -- sometimes an entire relationship is at risk. Putting financial issues between two people can alter a relationship forever, for better or worse.
The stress of borrowing money can strain or break a relationship, or the bond and trust involved in repaying a loan can enhance it. Because paying off a personal loan is a multi-year commitment, make sure you and your cosigner have a solid relationship that can stand the test of time and have a history of open communication and honesty.
What to Do If You Can't Get a Cosigner for Your Personal Loan
If you can't get a cosigner for your personal loan, you might still be able to qualify for a lesser unsecured loan amount or a secured loan. In fact, many lenders extend personal loans to people even if they have poor or limited credit histories. "As for getting a cosigner for personal loans, it's generally not needed since many loan sites will accept borrowers with credit scores as low as 580 FICO," said Hogue.
Without a cosigner, you might pay more in interest over the lifetime of the loan, but you could consider getting a loan on your own as an opportunity to build your credit history and FICO score. If you are successful, you could qualify for better loan terms in the future without ever having put someone else's credit at risk.
Keep Reading: How to Compare Personal Loan Rates
This article originally appeared on GOBankingRates.com: How to Apply for a Personal Loan With a Cosigner