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You need to take out a personal loan but you don’t have the best credit score to get approval. Adding a cosigner to your loan application will improve your chances of getting approval and can have the added benefit of lowering the interest rate.

With two borrowers on your loan application, you’ll both be responsible for full repayment of the loan.

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What is a cosigner?

A cosigner is someone legally responsible for paying back the loan if the primary borrower defaults, essentially acting as a guarantor. If you have a poor or limited credit history, a cosigner can give the lender more confidence that they will receive full repayment and improve your odds of obtaining approval.

With a stronger credit score and higher income, a cosigner can help lower the interest rate of the loan. While the cosigner does not receive the loan principal or make monthly repayments, they are legally liable and responsible for ensuring the full loan gets repaid.

Who needs a cosigner for a personal loan?

A cosigner can help strengthen your loan application and from the lender’s perspective, lower their risk of not getting paid back. Here are several reasons why you may consider a cosigner for your loan:

  • Poor or limited credit history: A low credit score reduces your chances of getting approved for a loan. A cosigner with a strong credit history can help lenders look past this and view your application on more favorable terms.
  • Low or unstable income: If you do not meet the minimum income requirements set by your lender or your income is unstable, a cosigner can help offset the lender’s risk.
  • High levels of debt: If your debt-to-income ratio is high, the lender will have less confidence in your ability to make repayments, you may want to consider a cosigner.
  • Investing in higher earning potential: If you currently have a low income and are looking to invest in your future earning potential, a co-signed personal loan can help finance the transition on more favorable terms.

Benefits of cosigned personal loans

There are many benefits to having a cosigner for your loan, especially when you have a poor credit score and lower income. Some of these benefits include:

  • Increase chances of getting approved: A cosigner adds a second borrower to your loan agreement, increasing your chances of approval as the lender has greater confidence that they will be repaid.
  • Get a faster approval: Having a cosigner can help speed up the review process for lenders and help you obtain a loan faster than applying on your own.
  • Lower the cost of borrowing: The interest rate you receive for your loan will depend on many factors including your ability to pay back the loan given your credit score and income. Using a cosigner with a higher income and strong credit score can help to lower the cost of borrowing and make repayments more attainable for you.
  • Access to a larger loan: As well as receiving a lower interest rate, with a cosigner you could also be eligible for a larger loan, giving you more cash on hand for when you need it.

In addition, if the loan is paid off on time, you and your cosigner may see an increase in your credit scores, although the impact for your cosigner is likely to be minimal if they already had a strong credit score to start.

What to look for in a cosigner?

When looking for someone who will make a good cosigner, a great place to start is with close friends, family, or your spouse. It’s important that you trust this person as removing a cosigner can be a long process.

Your cosigner should have a stronger credit history than you and can pay back the loan if you are unable to meet repayments. Many lenders recommend a good or excellent credit rating with a credit score above 670.

As your cosigner will be taking on more debt, they’ll need to meet the minimum debt to income requirements of the lender.

The risks of a getting cosigned personal loan

Asking a friend or family member to cosign for a personal loan can have benefits in helping you qualify for a loan but there are also consequences to consider.

To start with, it can be difficult to remove someone from a co-signed personal loan. If your relationship breaks down or takes a bad turn, you could be left stuck with a co-signer that will not cooperate during a time of need. Make sure that your cosigner understands their financial obligations before signing the loan documents.

In addition, if your cosigner falls upon economic hardship during the loan, they may not be able to help you when it’s most needed. This can negatively hit your credit score and also put your cosigner’s credit reputation at risk.

Trust and communication are key in the relationship between a primary borrower and a cosigner. The financial ramifications can be severe in your ability to access future credit if loan obligations are not met on time. You may need to get the loan refinanced to remove a cosigner or ask the lender to reassess your financial circumstances. This can be a long process and your credit history can be negatively impacted in the process.

Are there alternatives to using a co-signed personal loan?

If you prefer to avoid the risks of having a cosigner or you’re looking to explore alternatives, here are a few options you can consider:

  • Focus on improving your credit: You can boost your credit score by paying your bills on time and paying down your debt. This will add to your positive credit history and increase the confidence a lender will have in your ability to repay loans.
  • Secured credit card: A secured credit card requires a cash deposit normally equal to your credit limit and can help you build or rebuild your credit rating.
  • Obtain a secured personal loan: It can be easier to obtain approval for a secured personal loan, as it is backed by an asset, such as a home or a car. However, if you are unable to make repayments, the lender can seize your asset.
  • Correct any mistakes on your credit report: Mistakes can negatively impact your credit score. It’s a good idea to review your report and correct any errors.
  • Apply for a smaller loan: Based on your credit history, you may be eligible for a smaller personal loan. Lowering the amount can help you get approved.
  • Refinance other debt: If you have other loans or debt that needs to be paid off, it can be beneficial to get them refinanced first at a lower rate. This can help free up some of your income and give you spare cash that can be put towards other areas.

Does getting a cosigner impact my credit?

The impact on your credit is the same whether you use a cosigner or take out a personal loan without a cosigner. It can however help you obtain approval for your loan and get better loan terms.

Where to get a personal loan with a cosigner

Not all lenders allow for cosigned loans. It’s a good idea to shop around for a lender, review their terms and conditions and see if you can qualify for the loan first.

Lenders can include banks, credit unions, and online lenders. While it can be difficult to obtain a personal loan from a larger bank, many smaller banks and credit unions will allow you to apply with a cosigner and if you’re already a member, you could receive more favorable terms.

How to apply for a cosigned personal loan

If you’re unlikely to receive approval when applying for a personal loan, having a cosigner can increase your chances with more favorable terms. When searching for a personal loan, it’s a good idea to shop around to find the best lender for your requirements. Here are a few key factors to keep in mind:

  • Compare the best rates: Lenders will offer different interest rates. Make comparisons with multiple lenders, comparing rates and terms online and with your local bank or credit union.
  • Read the terms and conditions: Terms can differ between lenders and it's important that you and your cosigner fully understand your obligations under the loan agreement. After all, any missed repayment will negatively impact both of your credit scores.
  • Consider your financial situation: It may be that applying for a personal loan with a cosigner is not the best option for you or that the repayment terms are too stringent. It’s a good idea to explore all the options available and go with the best one that fits your financial needs.

If you decide to get a personal loan with a cosigner, your chances of approval and receiving better terms increase. But, be mindful of the financial responsibility as both of your credit scores can be impacted for years to come.

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Loan rate & terms disclosure: Prequalified rates are based on the information you provide and a soft credit inquiry. Receiving prequalified rates does not guarantee that the Lender will extend you an offer of credit. You are not yet approved for a loan or a specific rate. All credit decisions, including loan approval, if any, are determined by Lenders, in their sole discretion. Rates and terms are subject to change without notice. Rates from Lenders may differ from prequalified rates due to factors which may include, but are not limited to: (i) changes in your personal credit circumstances; (ii) additional information in your hard credit pull and/or additional information you provide (or are unable to provide) to the Lender during the underwriting process; and/or (iii) changes in APRs (e.g., an increase in the rate index between the time of prequalification and the time of application or loan closing. (Or, if the loan option is a variable rate loan, then the interest rate index used to set the APR is subject to increases or decreases at any time). Lenders reserve the right to change or withdraw the prequalified rates at any time.

Requesting prequalified rates on Credible is free and doesn't affect your credit score. However, applying for or closing a loan will involve a hard credit pull that impacts your credit score and closing a loan will result in costs to you.