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If You Have a Low Credit Score, You Can Still Get a Personal Loan – You Just Need Help

When you need money to cover an emergency expense but don’t have a strong credit record or enough income to qualify for a personal loan, a co-signer can be a valuable ally.

If your lender accepts this arrangement, a co-signer with a high credit score and a steady income could convince a loan officer to approve your loan. The co-signer is agreeing to be responsible for the loan and to pay it back if you aren’t able to. You will need to convince the co-signer – who is taking on a risk for little reward – that the arrangement is a positive one for both of you.

Can You Get a Co-Signer for a Personal Loan?

Some lenders will allow a co-signer for a variety of lending products, including mortgages, auto loans and personal loans. Although not every lender offering personal loans will accept a co-signer, there are many that will.

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Co-signers can make it possible for people with a limited or spotty credit record to get a loan. The co-signer’s strong, steady income and solid credit record – which is reflected in a higher credit score than the primary borrower – is meant to reassure the lender that the loan will get repaid. Even if you can get approved for a loan on your own, you might want a co-signer with a higher income and better credit record because it could lower your interest rate. It could also help you avoid predatory loan companies that charge high fees and rates.

There is a difference between co-borrowers and co-signers. In a co-borrowing arrangement, both people benefit from the loan proceeds. In a co-signing arrangement, only the primary borrower does, even though the co-signer is legally responsible for repaying your loan if you’re not able to. Couples are more likely to be co-borrowers, while a co-signer could be a parent who helps a child get a loan.

What Lenders Offer Co-Signed Personal Loans?

Many lenders – traditional banks, credit unions and online lenders such as OneMain Financial – will allow a co-signed personal loan.

The Credit Union National Association says that most credit unions offer the option of having a co-signer on a personal loan. “The co-signer option reduces the likelihood that a borrower will default and, by extension, makes it possible for higher-risk borrowers to safely obtain credit,” says Mike Schenk, CUNA’s chief economist. “Credit unions’ priority is serving their members in safe and efficient ways.”

Navy Federal Credit Union allows members to apply for a personal loan with a co-signer. “Whether you’re the borrower or the co-signer, make sure you have a sound repayment plan before you sign the paperwork,” says Joe Pendergast, vice president of consumer lending at Navy Federal. “Have a specific purpose for the personal loan and ensure you budget for the payments, otherwise, you may stretch yourself beyond your means.”

Most community banks will approve a loan with a co-signer, says Ron Haynie, Independent Community Bankers of America senior vice president of mortgage finance policy.

“This is particularly common in instances where a person is looking to finance a car loan or apply for a personal loan and may meet income qualifications but does not have much established credit,” Haynie says. “In fact, this is often considered a good step to help build and grow a credit history and offers a great opportunity to start building a relationship with a community bank.”

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Steps to Prepare for a Co-Signed Personal Loan

If you’re dealing with a financial emergency, a personal loan could be the answer to getting money quickly. But you shouldn’t rush the co-signing process, because the co-signer needs to understand and appreciate all the legal and financial ramifications before making this commitment.

Find the right person. If you need a co-signer, you’ll want to use someone whose financial record would assure the lender that the loan will be paid off even if you can’t make the payments.

“Ideally, it’s a trusted individual, a family member, maybe a friend because there is going to be a shared degree of responsibility,” says Jeffrey Arevalo, financial wellness expert at GreenPath Financial Wellness, a national nonprofit credit counseling agency.

Some co-signers might prefer only to step in if you can’t get approved at all for a loan. Others may be willing to help you qualify for low-interest loans for excellent or good credit, instead of a higher-interest-rate loan for fair credit.

Tell the co-signer about the financial ramifications. Co-signers might not realize that this will be a one-sided financial arrangement. “A lot of times people don’t understand what they’re getting themselves into,” says Bridgette Long, an Atlanta-based financial coach.

You should explain that co-signed loans will show up on credit reports, that co-signing affects debt-to-income ratio, and that co-signing might even prevent the co-signer from getting another individual loan.

“You have to understand what you’re asking of an individual,” Long says. “They’re putting their financial position on the line.”

Have documents ready. The co-signer shouldn’t have to ask for the loan application documents. Have them ready for review, and give the prospective co-signer time to consider the request.

“Unfortunately, some of the prep work is not done in these situations,” Arevalo says. “People are in a hurry to get the loans, and they’re not thinking of the long-term ramifications sometimes.”

Have a plan. You should be able to present prospective co-signers with a plan for how long they will need to stay on the loan. Also, be prepared if the potential co-signer asks you to include a deadline in the loan document for you to refinance or pay off the loan and release the co-signer’s responsibility.

Communicate. After the loan document is signed by both parties, keep the co-signer in the loop. Make sure you provide the co-signer with online access to the financial institution, as well as any other necessary notifications.

Also, you’ll want to establish a process for how and when you’ll notify the co-signer if you aren’t able to make a particular month’s payment. Since a delinquent payment would show up on each party’s credit reports and hurt future credit scores, you’ll want to give the co-signer a chance to cover that payment and potentially more.

“You want to catch any issues before they become problematic,” Arevalo says.

Why You Might Need a Co-Signed Personal Loan

Here are a few situations that might call for a co-signed personal loan:

Expected future income. If you are about to graduate from college and start a new career or otherwise expect your income to increase soon, a co-signed personal loan could be an ideal “bridge” from a low-income present to a future with a steady income, when you could handle the loan expense.

Emergency expense. You might not have much of a choice if you need to buy an essential item or pay off a home or auto repair bill but don’t have the cash or credit on hand to make the purchase. If possible, it’s best to work with a trusted, conventional lender rather than one that charges high interest rates.

Consolidating high-interest debt. Obtaining a personal loan with an interest rate that is lower than your credit card interest rate and allows you to consolidate it into one payment might be worth considering.

Alternatives to a Co-Signed Personal Loan

Before you pursue a co-signed personal loan, consider these alternatives:

Borrow from friends or family. If you have an expense that you can’t cover, you might be able to get help from a family member or friend. The payment plan should be in writing and might need to include interest. Keep up with payments or you might permanently strain your relationship.

Pursue financing plans. If you need a personal loan to pay for an unanticipated expense like a major appliance, home repair or medical bill, check with the company to see if there is financing available. You might be able to purchase a furnace, for instance, on a low-interest payment plan over a year or so.

Be patient. Once you get a personal loan, your pool of available spending money will shrink while you pay it off. That can put a major strain on your ability to pay down other debt, save and pay for ongoing and unexpected expenses. If you’re thinking about getting a loan, make sure it’s going to pay for something you need, not just an item you want.

“As a financial coach, I always tell my clients patience is a virtue,” Long says.

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