You need to take out a loan, but your chances of getting accepted are slim. Whether it’s bad credit, low income, or no financial history, we’ve all been there– it’s time to get a co-signer. With the help of a co-signer, your chances of getting a loan are much higher, but what’s the catch?
Here is our definitive guide to co-signing a loan and how getting a co-signer can help you:
What is a Co-Signer?
When taking out a loan, a co-signer is a person that signs the loan as well. Usually a friend or family member, co-signers are individuals with a strong credit history and act as someone to fall back on when you can’t afford to make minimum payments. When applying for and signing a loan, co-signers fill out the same information you do; they just aren’t responsible for making payments.
If you have difficulty making loan payments or are a first-time borrower, co-signers take on partial responsibility for the loan. They can make payments if you cannot.
Generally speaking, there is nothing wrong with needing a co-signer for a loan: it won’t affect your credit, and a reliable co-signer can also be a strong asset in emergencies. You can also co-sign loans for others if you have a reliable credit history, a high credit score, and make above the minimum income requirement for a specific loan.
Does a Co-Signer Affect my Credit Score?
Adding a co-signer to a loan won’t affect your credit score at all, but other parts of the borrowing process will affect both of your credit scores. To start, your credit score will always decrease slightly when you first take out a loan and rise as you make monthly payments. If you fail to make monthly payments on time, it will damage both your credit score and your co-signer’s.
When to Get Help From a Cosigner
If you’re a first-time lender, you’ll probably need a co-signer regardless of your ability to repay a loan, especially when borrowing large amounts of money as student loans. However, there are other times when adding a co-signer to your loan application can help:
Poor, Limited, or No Credit
First-time lenders typically have very limited credit experience, if any at all. High school graduates largely fit this category since they’ll most likely require student loans for college and don’t have any credit history to work off of. Lenders will be hesitant to accept loan applications without any credit history because it’s too much of a risk; a co-signer vouches for the borrower in these situations.
If someone has a low credit score, co-signers still act as allies that vouch for the borrower they sign with. They also take partial responsibility for the loan if the borrower fails to make payments. Generally speaking, a credit score of 580 or lower is poor, but co-signers can also help people with decent credit get lower interest rates.
You are Already in (lots of) Debt
People with a high debt-to-income ratio are less likely to qualify for a loan simply because they’re in too deep. Co-signers act as a way to mitigate the risks that come with borrowing money on both your end and the lender’s end.
You Struggle Meeting Minimum Income Requirements
This is another common issue high-school graduates face when applying for student loans. Without a stable income that fits a lender’s requirements for minimum payments, it’s near impossible to get accepted. That’s where the co-signers come in. Since co-signers have access to the loan account, they can make monthly payments if needed– they just aren’t held responsible for paying them.
What to Look for In a Co-Signer
Hunting around for a co-signer is arguably more difficult than looking for loans with them since there’s a huge social aspect to co-signing a loan too. When you look for a co-signer, keep the following in mind:
Strong Credit History
Your co-signer will need a strong credit history and a good credit score to vouch for you properly. Since lenders use credit scores as a general summary of how reliable you are financially, a co-signer with good credit is necessary.
Steady Income
A steady, stable income is another important thing to look for in a co-signer. A stable income helps increase trustworthiness in the eyes of lenders, and if you need extra financial assistance, it’s best to lean on someone who has room to help you in their budget.
A Lower Debt-to-Income Ratio
A debt-to-income ratio is a comparison of how much debt you pay each month versus how much you make in a month. High debt-to-income ratios leave people scraping by after bills, and even with a stable income that meets a loan’s minimum income requirements, it can be hard to get by after billing if you’re in too much debt. In this scenario, a co-signer can help tackle that debt if you’re unable to.
Trust and Strong Communication Skills
When it comes to the social aspect of getting a co-signer, you can’t just pick anybody off the street. A co-signer has to be someone you trust and can communicate with regularly in case of emergencies. Typically, most people select friends, family members, or other loved ones to co-sign for them.
When looking to ask someone if they can co-sign for you, you’ll also need to keep in mind that this decision will affect their credit score and chances of borrowing money in the future. Make sure the person you sign with is willing to communicate, take on this challenge, and not hold it over you.
If You Can’t Get a Co-Signer…
In the case you can’t get a co-signer, that’s okay! There are still a few things you can do:
Keep Looking for Lending Options
Tons of loan companies out there will lend to people with bad credit or no credit. While these loans usually have higher interest rates and are a bit smaller than other unsecured loans, they can help in emergencies.
Consider Secured Loans
A secured loan is another way to work around using a co-signer, but you’ll need to have some form of property that you can use as collateral. Secured loans are great for people with low credit because they tend to have lower interest rates than unsecured loans for people with poor credit.
Build Your Credit
If you’re not in a rush to take out a loan, use the time you have to build your credit. Credit-building loans are one way to improve your credit score, but you can also take out a credit card if you don’t have one or use your credit card at least once a month to help build your credit. Every little bit counts! Check out our review of the best credit building apps available today.
In Summary
This comprehensive guide has delved into the world of co-signers and their role in securing loans. Co-signers, typically friends or family members with a strong credit history, can be a lifeline for borrowers facing challenges like poor credit, high debt, or difficulty meeting minimum income requirements. Making an informed choice regarding co-signers can be the difference between getting approved or denied.
