Using a personal loan can be a convenient way to pay for some of life’s expenses, whether it’s a wedding, travel, home remodeling, or some other big-ticket item.
While this may seem like an ideal solution, it’s important to think through the decision to use a cosigner carefully.
The individual you choose will be on the line should you fail to make payments on your personal loan, which could impact their credit score and personal finances.
“Usually, some degree of history is required. For example, with Achieve Personal Loans, it’s two years. Actual credit scores also figure into ...
Minimal credit history
...whether or not you can obtain a personal loan, and at what rate, but just having credit history is a separate factor,” says Rafferty.
“When using a cosigner because your debt-to-income is too high, be careful,” says Meade.
Debt-to-income ratio is too high
“Make sure that you still choose a loan you’re able to afford. Having a cosigner may allow you to qualify for a larger loan, but you want to ...
...make sure that you will be able to afford the payments, or it may harm both your credit score and your cosigner’s if you have to default.”
Individuals who make good cosigners include relatives, friends, or your partner.
How to select a cosigner
“Because cosigners are responsible for making loan payments if the primary borrower does not, they’re taking on considerable risk. As such, ...
...it’s critical to have close and excellent communication with a cosigner so that they know your payment activity,” says Rafferty.
“Given the trust that must exist between the primary borrower and the cosigner, the cosigner is often a spouse, parent, or close family member.”
”A cosigner also needs to be someone who is comfortable sharing their financial information with you, as you need to be sure that this is someone who can help your approval odds,” says Meade.
Risks of using a cosigner
“While a cosigner may help you in obtaining a personal loan or in getting a better interest rate—there is the possibility for ...
...strained relationships. And if you have trouble repaying, it may even result in legal action against you,” says Rafferty.
Additionally, depending on the personal loan contract you sign, you may not be able to remove a cosigner from the loan if your finances improve at some point in the future.
This is an important consideration should your relationship with your cosigner change or end for any reason. For the cosigner, ...
...there are also risks to weigh carefully—first and foremost that the primary borrower does not make payments as promised.
“What’s more of a concern, though, is if the borrower is unable to make the payments and doesn’t inform the co-signer,” says Brian Kuhn, ...
...senior vice president and a financial advisor at Wealth Enhancement Group, a financial advisory and wealth management company.
“This might come from fear they will be upset or embarrassed…but if the cosigner doesn’t know that payments aren’t being made, they could be negatively affected before they have the opportunity to resolve the situation.”
And if you choose to proceed, be sure to find a cosigner with whom you have a trusting relationship and are comfortable sharing personal financial information.
The takeaway