Maybe you want a car loan so you can drive to work. Public transportation where you live is poor; relying on it severely limits where you can work, compromises your safety or takes up way too much of your free time. You're convinced you can make the payments, but you don't have quite enough income to qualify.
Perhaps you’ve just graduated from college and you’re trying to get your first apartment. You’re no longer eligible for student housing, but you don’t have a job yet and can’t convince any landlord to take a chance on you despite your 3.8 grade point average.
Or maybe you’re trying to get back on your feet after unemployment or health problems depleted your savings and led to your defaulting on loans, damaging your credit history and making it impossible to get a new loan or a place to live.
A co-signer could solve any of these problems, but maybe you don’t want to strain your relationship with a friend or relative by asking him or her to co-sign a loan or a lease. It’s also possible that you don’t know anyone who is willing or able to co-sign. What are your alternatives?
Become a Subtenant or Roommate
If it’s an apartment you’re after, you can try finding a situation where someone else is already fully obligated to pay the lease but is looking for help with the rent. You might be able to sublease from someone who is traveling or had to move unexpectedly and couldn’t get out of the rental agreement. You might also be able to rent a room from someone who will occupy the apartment with you, but doesn’t need to add your name to the lease. In these cases, since the landlord already has a signed agreement from someone who has passed a credit check, paid a security deposit and promised to pay the rent for the full lease term, they may not check your credit or even care who occupies the place as long as they’re receiving rent checks on time each month from the original renter.
Ask the individual you want to sublet from or room with for a copy of the lease to make sure you won’t be violating the contract. The person on the lease should get written permission from the landlord before you move in, and you should sign a sublease or roommate agreement with the tenant. Be aware of the possibility that if you’re paying the person on the lease rather than the landlord, he or she could take your money and not remit it to the landlord.
Use a Co-signer Service
To secure an apartment, you could also hire a co-signer service. For a fee, a third party will guarantee to your landlord that it will pay your rent if you do not. You must apply for approval with a co-signer service, and there is often an application fee. If you’re approved, the service will give you a co-signing certificate to submit with your rental application. It’s up to the landlord whether to accept your co-signer.
If the landlord approves, you’ll have to pay the co-signing service a fee, calculated as a percentage of your rent, even if it never has to pay your rent for you. If you imagine you can get your fee back by not paying your rent and forcing the landlord to collect from the co-signing company, think again. The co-signing agreement you sign will state that you have to reimburse the co-signing company for any rent it pays on your behalf.
One company that offers this service is Insurent. It charges a one-time, nonrefundable flat fee based on a percentage of your rent after your apartment application is approved. If you can’t find a landlord willing to accept a co-signer service’s guarantee, you might be able to secure an apartment by paying a larger security deposit or prepaying the rent.
Use Prosper or Lending Club
If you want to borrow money and conventional lenders have rejected you, peer-to-peer lending might be an option. The two most prominent companies in this space are Prosper and Lending Club. Both companies will check your credit score when you apply, but they do not require borrowers to have perfect credit, and you can use the borrowed money for a variety of purposes. The worse your credit score, the higher your interest rate will be, and you might not get approved, but it’s worth applying to find out.
Prosper requires borrowers to have a credit score of at least 640. Lending Club does not list a minimum credit score requirement on its website, but other sources have reported that the minimum is 660. (To learn more, read Can’t Get a Bank Loan? Turn to Your Neighbor.)
Establish or Rebuild Your Credit Bureau File
Lenders require co-signers when a borrower has no credit or damaged credit. In either situation, you can create or re-establish a favorable credit profile by applying for a secured credit card that will report your activity to Experian, Equifax and TransUnion, the three major credit bureaus. All you need to do is make one small purchase a month on the card and pay it off before the payment due date. (Check out Getting a Secured Credit Card to learn how this process works.)
If your problem is that you have no credit, within about six months of beginning to use your secured credit card, borrowing only a little and paying it promptly, you’ll meet two of the most important criteria for having a high credit score: a low credit utilization ratio and a history of paying on time. At this point, you might qualify for a loan or an apartment without a cosigner, assuming you earn enough income. See Start Building Solid Credit At A Young Age.
If you’re repairing damaged credit, you may have to wait longer, because negative items remain in your file for years. Lenders need to be convinced by your credit score that your new, positive repayment history isn’t just a short-term change.
Heed the Message
If you can’t get a loan or an apartment without a co-signer, this might be a signal that it's not a good time to borrow money or obligate yourself to pay a lease. Creditors or landlords want someone else to guarantee payment because they don’t think you’re good for the money. It's likely that they're right.
You might have excellent prospects – or you may be experiencing a rare bout of misfortune – but in your present circumstances, you probably can’t afford what you’re seeking. You’re trying to take a gamble that you’ll get a new job and the payments will become affordable, or that your health will improve and you’ll be able to go back to your full-time job instead of collecting a small disability check. But your actual financial situation at the moment might be tenuous, and that’s why you’re not getting approved.
Having your loan or apartment application rejected can be a blessing in disguise when you can’t really afford it. Instead of adding more stress to your situation by taking on another financial obligation – and trying to drag someone else into your problems by asking them to co-sign, potentially damaging an important relationship – look for alternatives that you can afford on your own. They might be less than ideal, but when your situation improves, you can reapply for another loan or apartment.
The Bottom Line
It’s frustrating for sure to not be able to live where you want or buy something you think you need, and most of us have been in this situation at some point. But borrowing money and renting an apartment are privileges, not rights. Lenders and landlords make their decisions based on financial considerations, and you shouldn't take their rejection personally.
If you can’t get a co-signer or don’t want one, remember that you have options; they just require some patience and outside-the-box thinking. (For related reading, see Getting a Loan without Your Parents.)