Personal loans can be used for debt consolidation, to cover an emergency, or to pay for a major expense. But it’s not always easy to qualify for a personal loan — especially one with a low interest rate. Sometimes, lenders may ask — or require — you to apply for a loan with a co-signer.

Co-signers agree to take on the responsibility for paying a loan if you, the primary borrower, stop making payments. By adding a co-signer on a personal loan, you can increase your chances of getting the loan approved and securing a more competitive rate.

Let’s look at when it’s a good idea to add a co-signer (and when it’s not), how it works, the risks of applying for a loan with a co-signer, and some alternatives when you aren’t using a co-signer.

Why you might want to add a co-signer to a personal loan

When you apply for a personal loan, the loan lender (a bank, credit union, online lender, or other financial institution) evaluates your:

• Credit score: A number used by financial institutions to estimate how likely you are to pay back a loan on time and to determine your interest rate

• Debt-to-income ratio (DTI): A measurement of your total debt compared to your gross monthly income, which is used to gauge if you can afford your monthly payments

• Credit history: How long you’ve had credit, including credit cards and other loans, and how often you’ve paid on time

• Income: How you earn money and how much you earn

If you don’t meet a lender’s requirements such as minimum credit score requirements and a stable income, you won’t be approved. But if you apply for a loan with a co-signer, their credit score, DTI ratio, history, and income are also taken into account. This can help you qualify for a loan you couldn’t get on your own. Remember, though, that every lender has different risk tolerances, so even with a co-signer, you should still shop around to find the best loan and interest rate.

How does using a co-signer work?

When you apply for a personal loan with a co-signer, you need to provide the same financial information about them as you do for yourself. This includes identity verification, like a Social Security number, and proof of employment and income, usually a pay stub or W-2.

The lender uses this information to evaluate the co-signer’s ability to repay the loan — the same as they do you. This means that your co-signer needs to have a low DTI ratio, higher income than you, and good to excellent credit — in general, a score of 670 or higher.

It also means your co-signer needs to be someone you trust to take over loan repayments if you’re unable to — and someone who trusts you to be responsible about making your monthly payments.

Why? Co-signing a personal loan impacts the co-signer’s credit as well. The loan will show up on their credit report, contribute to their DTI and potentially impact their ability to qualify for a loan or credit themselves. And if you miss payments or default on your loan without letting the co-signer know you’re having trouble, both you and the co-signer will take a credit hit.

Is a co-signer the same as a co-borrower?

Though the terms are often used interchangeably, co-signers aren't the same as co-borrowers. While a co-signer agrees to be responsible for your personal loan, they’re not entitled to the funds. In other words, you are the sole and primary borrower; you own the loan and how you use the money you borrow is up to you.

On the flip side, a co-borrower (or co-applicant) is entitled to the loan’s funds because you’ve applied for a joint loan. This means that co-borrowers share the same responsibilities as you and a co-signer — they agree to repay the loan on time. But a co-borrower shares ownership of the loan with you and is entitled to the loan funds.

Risks of taking a loan with a co-signer

A co-signer can help you get approved for a loan you couldn’t get on your own, but it’s not without its risks — to both parties. Potential risks include:

Relationship issues

When someone agrees to co-sign your personal loan, they’re putting trust in you to pay it back in time. If you don’t, their credit takes a hit alongside your own. This possibility — no matter how unlikely — can add stress to your relationship, especially if your personal loan will take years to repay.

You can — and should — work with your lender to keep your co-signer in the loop. Some lenders will send a copy of the monthly statement to the co-signer or agree to alert the co-signer of any missing or late payments. This gives the co-signer the chance to make good on the loan without taking a hit to their credit – though it may lead to an awkward conversation with you about your personal finances and responsibilities.

If you’re struggling to make payments, let your co-signer know as soon as possible. They may be willing to take over payments until you get back on your feet or figure out another solution.

Damage to the co-signer’s credit

Taking out a personal loan impacts your credit — and that of your co-signer. This can make it difficult for your co-signer to qualify for other loans like a car loan or mortgage or to secure the best rates.

In addition, late and missing payments or a loan default are also reported to the credit bureaus on both individuals’ reports. If you pay your bill late or stop making payments entirely — and your co-signer is either out of the loop or unable to make the payments on your behalf — their credit is dinged alongside your own.

And if the unpaid loan goes to collections, bill collectors may pursue both of you. The lender could take either (or both) of you to court, garnish wages, or put a lien on property owned by you or your co-signer.

Difficulty finding a lender

Financial institutions don’t always allow co-signers for personal loans. This can make it difficult for you to qualify for a loan in the first place. It can also make it difficult to secure a loan with a low or favorable interest rate, particularly if you have poor or no credit history.

This means you may need to spend more time shopping around for a lender that allows co-signers. It can also be a good idea to try to prequalify for a personal loan — a process that starts with a soft credit check (which doesn’t impact your credit score) to evaluate your basic information, such as your income, employment status and expenses — to determine which specific loans you qualify for.

If you get denied for prequalification, then you can consider applying with a co-signer — or find a different lender who allows co-signing.

Difficulty removing the co-signer

Taking out a personal loan with a co-signer means two parties are responsible for paying it off, limiting the risk to the lender. Removing the co-signer increases the lender’s risk, which means it’s not always easy — or possible — to do.

You can request a co-signer release form from your lender, though this depends on your lender and loan agreement. This form releases the co-signer from their responsibility, leaving you as the sole party responsible for paying back the loan. If your lender offers a co-signer release form, its eligibility requirements may be strict, requiring you to demonstrate your ability to repay the loan yourself and to have maintained on-time payments for some or all of the loan’s term to date.

Refinancing is another, more roundabout, way to remove a co-signer from your loan. A loan refinance replaces an existing loan with a new one, which means qualifying all over again for a personal loan. That said, if you’ve improved your credit profile or increased your income, you might qualify for a loan yourself.

Situations when it makes sense to add a co-signer

You don’t always need a co-signer to take out the best personal loan for your needs. That said, there are situations when it makes sense to add a co-signer. These situations include:

Poor (or bad) credit

FICO credit scores range from 300 to 850. In general, the higher your credit score, the more likely you are to qualify for a personal loan. Lenders often prefer you to have a minimum score between 610 and 640 to qualify, though some may approve you with a score as low as 580 – but with a less favorable interest rate.

If you don’t have good credit, applying with a co-signer can increase your chances of getting approved and help you score a lower interest rate.

Lack of credit

If you don’t have a credit history, lenders have no basis on which to judge your likelihood of repaying a personal loan. This is common if you’ve just graduated from school or haven’t begun using credit yet.

Applying with a co-signer can increase your chances of approval while helping you build credit over time as long as you make good on your loan payments. Because the lender evaluates the co-signer’s credit history, it has some basis on which to evaluate the likelihood of repayment.

Insufficient income

Some lenders may specify a minimum income requirement for certain loan amounts; if you don’t meet this threshold, you won’t qualify for the loan.

Adding a co-signer to your personal loan application can help you qualify for it if the combined income of both parties exceeds the lender’s minimum income requirement.

High debt-to-income ratio

In general, lenders want to see a DTI ratio of 35 percent to 40 percent or less, which would leave 60 percent to 65 percent of your income available for other expenses (like a personal loan).

If your DTI is too high, a co-signer may increase your chances of qualifying for a personal loan.

Self-employment

Self-employment income can be unreliable, especially if you don’t have a solid track record of proven income or sufficient savings. Even if business is steady and you have recent stable income, lenders may be less willing to approve you if there’s a possibility your income may not remain stable before the loan’s paid off.

Adding a co-signer to your application can mitigate these concerns and improve your likelihood of getting approved.

Alternatives to taking a personal loan with a co-signer

It’s not always possible to find a co-signer for a personal loan, but there are alternative options and loan products to consider.

Take out a secured personal loan

Unlike auto loans or mortgages (which use a vehicle or home as collateral), personal loans are often unsecured. This means there are no assets for a bank to repossess and sell to recoup its losses if you fail to pay back the loan.

If you have a hard time qualifying for an unsecured loan, look for a lender that offers secured personal loans.

Apply for a joint personal loan

Some lenders that don’t allow co-signed loans may offer joint personal loans. With a joint personal loan, you apply alongside a co-borrower who shares your responsibility for repaying a loan.

The only difference? Your co-borrower would be equally entitled to the loan’s funds.

Build or improve your credit

To avoid taking out a personal loan with a co-signer, work on establishing and building your credit. But how?

• Become an authorized user: Ask a family member or friend to add you to one of their credit cards as an authorized user. Authorized users can use the cardholder’s credit card and, more importantly, share the card’s credit history.

• Have a diverse mix of accounts: Lenders want to see your ability to manage multiple different types of debt, including revolving credit (like credit cards) and installment accounts (like loans). This can contribute to as much as 10 percent of your FICO score.

• Make your monthly payments on time: Payment history makes up up to 35 percent of your FICO score, so late and missing payments add up. Paying your bills on time (or getting current) increases your credit score and makes you a more attractive borrower.

• Avoid high credit utilization: Your credit utilization rate is determined by dividing your total debt by your total available credit. The more debt you take on compared to your total available credit, the higher your credit utilization rate. In general, lenders prefer when you maintain a credit utilization rate of less than 30 percent, which shows you don’t rely on credit or debt to get by.

Use a credit card

If you can’t qualify for a personal loan — with or without a co-signer — consider applying for a credit card. This can be especially helpful if you need money quickly and you’ve been denied for an emergency loan.

As a type of revolving credit, credit cards give you consistent access to a credit limit. As you make purchases, your available credit falls, with every payment increasing your available credit once again.

While you still need to apply and qualify for a credit card, issuers can manage your risk by instituting a low credit limit and/or high interest rate. This means a credit card may not be the ideal alternative to a personal loan, but responsible use can help you build credit or finance a major purchase.

In addition, secured credit cards — which use a deposit as collateral — can help you establish and build credit.

Change your financial situation

Easier said than done, right? Try to improve your income — either via a promotion, getting a higher-paying job or taking on a side hustle — and reduce your expenses. You should also open a bank account and begin saving money, even if it’s just a few dollars a month.

While this method may take time, it can improve your overall financial picture and make it easier to qualify for loans in the future — or avoid needing them altogether.

Consider a bad credit loan – with caution

Some lenders and financial institutions specialize in loan offers for people with poor credit. But bear in mind that poor credit personal loans often carry high interest rates and expensive origination fees. This can make them an expensive loan option.

And certain unscrupulous lenders may prey on borrowers with bad credit, which means it can be easy to get stuck with a predatory loan that harms you more than it helps — for example, a loan with excessive late fees or prepayment penalties.

So treat bad credit personal loans as a last resort — and pay attention to the loan terms to ensure you’re not being taken advantage of.

FAQs

Does having a co-signer on a personal loan impact my credit?

When you take out a personal loan with a co-signer, you are the sole and primary borrower. This means you’re primarily responsible for the loan. While taking out the loan itself does impact your credit (by generating a hard credit inquiry and contributing to your debt-to-income ratio), the co-signer’s actions and credit don’t impact your credit — unless both you and the co-signer fail to make on-time payments or you default on the loan.

Who can be a co-signer?

Anyone can co-sign a personal loan, but your co-signer should be someone you trust (and who trusts you) who is capable of making loan payments if you start to fall behind. In general, parents, siblings, other relatives and close friends are often the best choices for co-signing a loan.

Do I always need a co-signer for a personal loan?

No. You only need a co-signer for a personal loan when you are unable to qualify on your own. In other cases, you may want to consider getting a co-signer if the loan’s interest rate is too high and would be lower with the addition of a co-signer.