The ease of borrowing money changes with the economy. Sometimes lenders have money to lend and are anxious to earn interest. On other occasions, you complete the paperwork and wait. Although your credit is good, your income is steady and you pay your bills on time, you’re young and don’t have a long credit history. A lender may decide you’re not creditworthy by its standards and ask you for a co-signer on the loan.
Personal Loan Approval
You’re more likely to get a loan if you have a co-signer. The co-signer is obligated to pay the loan if you default, so the co-signer decreases the lender’s risk. According to the Federal Trade Commission, as many as three out of four co-signers must pay on certain types of loans. The lender doesn’t have to take any specific action to require the co-signer to take over payments if you default. The extra signature may be the difference in whether you get the loan . Some personal loans allow you to remove the co-signer from the loan after a number of years of payments on time.
If you meet the lender’s standards of creditworthiness, you aren’t required to have a co-signer, guarantor or spouse’s signature for a loan in accordance with Regulation B of the Equal Credit Opportunity Act. Even if you can qualify for a loan without a co-signer, having a co-signer might speed the approval process and give you a better interest rate, according to Wells Fargo in a discussion of student loans. Once the lender completes the loan, the loan and payment history show up on a co-signer’s credit report. Credit-reporting companies such as Experian use co-signed loans in the debt-to-income ratio calculations for the borrower and the co-signer. The debt-to-income ratio compares the amount of debt you have to your overall income. The co-signer takes a hit on his credit report if the original borrower doesn’t pay.
Unsecured credit is a loan with no security, often a credit card or a student loan. The lender considers your assets to determine creditworthiness but doesn’t tie up your assets as security for the loan. You may not need a co-signer for a small loan. A lender can require that your spouse be the co-signer under some circumstances because of state community property laws. In other instances, you can choose anyone to be co-signer, particularly if you have enough personal assets that don’t require your spouse’s signature. A co-borrower is not the same as a co-signer. The co-borrower is equally responsible for the loan and may share in ownership of the purchase, whereas the cosigner’s responsibility starts when default occurs.
If the lender requires security for a personal loan, the security is at risk. A house is often security for a mortgage, and a car secures the loan for automobile financing. If you don’t pay, you lose the security. You'll find it easier to get a secured loan without a co-signer because the lender gets the collateral or security if you don't pay. If your collateral or security for the loan is community property, your spouse may have to co-sign the loan or be the co-borrower.
- Federal Trade Commission: Co-Signing a Loan
- Wells Fargo: All About Cosigners
- Experian: Cosigning for a Student Loan Can Affect Your Credit Report as Well as the Student’s
- Bankrate.com: Co-Signer Has Obligations, Not Rights
- Citizens Bank: Student Loans
- Federal Deposit Insurance Corporation: Guidance on Regulation B Spousal Signature Requirements
Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.