Finding the right co-signer for your loan
So, you’ve applied for a loan and been denied. Whether you are looking to get a personal loan, an auto loan, or a student loan, a rejection stings. Feeling like you are considered unworthy of credit can be a blow to your financial ego, but you need to understand that it is nothing personal. Banks and lending houses are in the business of extending money to people they believe are a safe bet for paying that money back. To assess the situation, a lender needs to look at a myriad of facts before offering a loan, and there are several reasons you may not qualify. Don’t fret, however, even if you don’t qualify for a loan on your own, you may be eligible for the same loan if you have a co-signer.
What is a Co-Signer?
A co-signer is a person who agrees to add their name and information to a loan to ensure you qualify. The co-signer promises that if you cannot repay the terms of the loan, they will be responsible for the loan. Often, young adults who cannot get a loan on their own will have a parent or family member co-sign. The co-signer takes responsibility for the terms of the loan if the primary loan applicant defaults. If neither the signer nor the co-signer can pay the loan, both party’s credit is impacted, and they can both be subject to legal action for repayment.
Why do I need a Co-Signer?
There are several reasons you may need a co-signer, but it boils down to two issues—a low credit score or an income that does not meet loan requirements. Your credit score may be too low to qualify for a loan, or you may have a debt-to-income ratio that is undesirable. If your income is the problem, lenders may be concerned that you do not have enough disposable income to pay back the money according to the terms of the loan.
Young adults often find they need a co-signer for loans because they lack the necessary credit history to secure a loan on their own. Your credit score is impacted by the length of your history, your repayment history, and how much of your credit you are using at any given time. An unsatisfactory rating in any of these categories can lower your credit score and make you a weak candidate for a loan.
When looking for qualified applicants, a lender also looks at your income. Most lenders have income requirements and thresholds for qualified applicants. The threshold depends on the type of loan, as well as the amount you are asking to borrow. For example, if you are looking to take out a $20,000 car loan, a lender may require you to have an income of at least $50,000 per year. Applicants who don’t meet the minimum are denied the loan unless they get a co-signer who would raise the income on the application above the threshold.
How do I pick the Right Co-Signer?
Picking the right co-signer is going to depend largely on your situation. If you need a co-signer who has a better credit score than you, you’ll want to look for someone with a long history of on-time credit payments, and a low credit utilization ratio. These are people who have been paying credit cards, mortgages and loans on time for years. They are credit holders who also don’t regularly run up credit cards, and carry high balances.
If you do not meet income requirements, but meet credit score requirements, you’ll need to look for a co-signer who has steady income. Adding a co-signer’s income to the picture can help tilt the debt-to-income ratio in your favor, and make it easier for you to be approved on your loan.
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