Acquiring a Personal Loan With a Co-Signer: Benefits and Risks

When struggling to acquire a personal loan on your own, adding a co-signer can make the difference between success and failure. This is because the co-signer vouches for your creditworthiness and reliability, increasing the chances that your loan will be approved.

A co-signer on a personal loan is someone who shares the financial responsibility for repaying the loan. Typically, co-signers are close family members or friends who have a good credit history and can make regular loan payments on behalf of the borrower. 

In addition to sharing responsibility for repaying the loan, co-signers are often responsible for making missed payments and dealing with any collections or legal actions resulting from non-payment. 

Because of this additional level of risk, it is important that borrowers thoroughly consider their options before requesting a co-signer. 

However, when used responsibly, personal loans with a co-signer can be an effective way to borrow money and build credit while avoiding other high-cost options like payday loans or cash advances.

Advantages of Co-Signed Loans

There are several notable benefits of co-signed loans:

Better Qualifications

One of the primary advantages is that it can help borrowers qualify for a loan they might not have otherwise been able to get on their own. The co-signer's good credit history and income are factored into the equation, giving the lender more confidence to approve the loan.

Lower Interest Rates

Another advantage is that it can help the borrower access lower interest rates. Lenders often see co-signers as an added layer of protection against default, leading to lower interest rates for the borrower. 

Helps Build Credit History

Lastly, this can help the borrower build their credit history. Since the monthly payments made towards the loan will be reported to the credit bureaus, this can help establish a positive payment history. 

Having a co-signer may be especially beneficial to those who have struggled with getting good credit in the past or need help getting approved for a loan in the first place.

Risks of Co-Signing a Loan

When you apply for a personal loan as a co-signer, you take responsibility for the debt if the primary borrower defaults. 

This means that the lender can come after you for the total amount of the loan and any additional fees and interest that accrue. In addition, your credit score will be adversely affected if the primary borrower misses payments, making it more difficult and expensive to borrow money in the future. 

As a result, co-signing a loan is a serious decision that should not be made lightly. Before agreeing to co-sign, make sure that you are comfortable with the risks and confident in the borrower's ability to repay the debt. Otherwise, you could find yourself facing financial problems down the road.

Another thing you should consider is that you may not be able to get out of the agreement later on. 

In most cases, co-signers are required to remain on the loan until it is fully repaid. This means that if the primary borrower decides to sell the property or refinance the loan, that will not free you of your obligations.

Also, remember that co-signing a loan will tie your finances with the borrower, which could have several implications. 

For example, if the borrower files for bankruptcy, you may be required to repay the debt yourself. Or, if the borrower dies, the debt may become your responsibility.

Alternatives to Co-Signed Loans

As you can see by now, co-signing comes with several risks, including the potential for damage to your credit score if the borrower defaults. 

Luckily, there are a few valid alternative options, though most are not as good for the primary loan borrower.

Rebuilding Credit History

There are a few ways to rebuild your credit, but the most common method is to get a secured credit card. With it, you put down a deposit that acts as your credit limit. 

Then, you use the card like any other credit card, making sure to make your monthly payments on time and in full.  After a period of responsible use, your credit score should start improving. 

This option takes time and discipline, but it can be a great way to help you get back on track financially. Plus, it won't put someone else’s finances at risk. That said, this is a poor option if you need a favorable loan right now.

Using Loan Sharks

These are private lenders who often charge high interest rates and fees. Although a generally risky and unfavorable option, it’s sometimes the only option that those with bad credit or no credit history have. 

If you decide to go this route, do your research and be wary of any lender who seems too good to be true. Also, make sure you understand the loan terms before signing anything.

Loan sharks often have unfair or predatory terms that can trap borrowers in a cycle of debt. 

Providing a Collateral

This could mean putting up your home or car as security against the loan, which can be a good option if you have equity in those assets. 

However, it's important to remember that you could lose your home or car if you default on the loan. Therefore you should only consider this option if you're comfortable with that risk.