Can You Have a Cosigner on a Personal Loan?
Adding a cosigner to a personal loan can improve approval odds, but it also comes with shared financial responsibility. Learn how it impacts both parties.
Getting approved for a personal loan can be challenging if your credit score or income isn’t strong enough. A cosigner can improve your chances of approval and help secure better terms. However, both parties must understand the responsibilities before moving forward.
How a Cosigner Functions
A cosigner is an additional applicant on a personal loan who shares full responsibility for repayment. While the primary borrower makes payments, the cosigner provides a financial safety net for the lender, increasing the likelihood of approval. A cosigner with strong credit and a stable income can also help secure a lower interest rate, reducing borrowing costs.
Lenders evaluate both applicants’ financial profiles, including credit scores, debt-to-income (DTI) ratios, and income. A cosigner with a credit score of 700 or higher is particularly beneficial for borrowers with limited or poor credit histories. Some lenders impose stricter conditions on cosigned loans, such as lower borrowing limits or additional documentation requirements.
Liability for Missed Payments
If the primary borrower misses a payment, the cosigner is legally responsible. Lenders treat both parties equally when collecting payments, meaning the cosigner can be pursued for the amount due.
Late or missed payments can result in financial penalties, including late fees of $25 to $50 per occurrence. If payments are more than 30 days late, they may be reported to credit bureaus, damaging both parties’ credit scores. If the loan remains unpaid, lenders may escalate collection efforts, including involving third-party debt collectors or pursuing legal action.
Defaulting on a cosigned loan can also strain personal relationships, especially if the cosigner is unaware of missed payments. Many cosigners are family members or close friends, and financial disputes can create lasting tension.
Credit Reporting for Both Parties
Once a personal loan is approved with a cosigner, it appears on both individuals’ credit reports. On-time payments help build credit, while missed payments harm both credit profiles. Lenders report payment activity to major credit bureaus—Experian, Equifax, and TransUnion—on a monthly basis.
The loan balance and payment history affect the cosigner’s credit standing. While personal loans don’t impact credit utilization like credit cards, they increase total debt. If the cosigner applies for new credit, such as a mortgage or auto loan, lenders consider this debt when assessing their ability to borrow.
If the loan is refinanced, the original cosigned loan may remain on credit reports until fully paid off. Some lenders report refinanced loans as new accounts while marking the original as closed, which can temporarily affect credit scores. If the loan is settled for less than the full balance, it may be reported as “settled” rather than “paid in full,” negatively impacting both credit profiles.
Cosigner Release Options
Some lenders allow cosigners to be removed from a loan under specific conditions, known as cosigner release. The primary borrower typically must make 12 to 36 consecutive on-time payments before requesting a release.
Even if a lender offers cosigner release, approval isn’t automatic. The borrower must meet the lender’s credit and income requirements independently, often requiring an improved credit score and sufficient income. Lenders may request updated financial documents, such as pay stubs or tax returns, to verify the borrower’s ability to manage the debt.
If cosigner release isn’t an option, refinancing the loan can remove the cosigner’s obligation. This requires the borrower to qualify for a new loan with favorable terms, which may depend on an improved credit profile and stable income.
Eligibility Criteria
Not everyone qualifies to be a cosigner. Lenders typically require a minimum credit score of 700, a history of responsible credit use, and a low DTI ratio—often below 40%. A cosigner with high existing debt may not be approved, even with an excellent credit score.
Stable and verifiable income is another key requirement. Lenders may request recent pay stubs, tax returns, or bank statements to confirm the cosigner has sufficient earnings. Employment history also plays a role, with many lenders favoring cosigners who have been with the same employer for several years.
Common Reasons a Lender May Require One
Lenders typically request a cosigner when the primary borrower does not meet approval criteria on their own. A low credit score is a common reason, as it signals a higher risk of missed payments. Borrowers with scores below 650 often struggle to qualify for unsecured personal loans without additional backing. A cosigner with strong credit mitigates this risk.
Insufficient income is another factor. Lenders set minimum income thresholds to ensure borrowers can afford monthly payments. If an applicant falls short, a cosigner with a higher income can help bridge the gap. This is particularly common for younger borrowers or those with irregular earnings, such as freelancers. A high DTI ratio can also lead to a cosigner requirement, as lenders prefer borrowers with enough disposable income to manage new debt.