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    Is Debt Consolidation WIth A Co-Signer More Manageable?

    Word writing text Credit Report

    When an individual is denied a consolidation loan due to a poor credit score, they are left with two options: 

    • Secure the loan with an asset 
    • Find a co-signer for the loan 

    Here we will look at why and when an individual may require a cosigner as well as what is expected of the cosigner.

    Why You May Need A Cosigner

    There are several reasons why a borrower would require a co-signer in order to secure a consolidation loan. 

    Below are the most common reasons why this occurs.

    Lack Of Credit History Or Bad Credit

    Generally speaking, there are two types of people most lenders will not work with: 

    People with bad credit

    People with no credit. 

    It is important to understand that bad credit and no credit are not the same. The latter refers to people who simply do not have any credit history, and the former is in reference to individuals who have had credit extended to them and failed to pay it back on time.

    Individuals with no credit history, or those with a credit score below 600, will likely need to enlist a co-signer if they want to be approved for a consolidation loan.

    Lack Of Income

    If an applicant is not generating income, they have no way of paying back their loan. 

    Lenders also look at an applicant's debt-to-income (DIT) ratio, which expresses their monthly debt obligations as a percentage of their gross monthly income. 

    If the applicant's DTI is too high they are unlikely to qualify for a loan. Those with no income will have a negative DTI, meaning their debt obligations exceed their monthly income, something that will surely disqualify them for a consolidation loan. 

    Anyone without an income can expect a lender to require a cosigner to satisfy the loan eligibility requirements.

    Lack Of Collateral

    Sometimes a lender will require a borrower to pledge an asset in order to secure a loan. 

    This is usually done when the applicant's creditworthiness is so low that the lender has doubts about their ability to pay back the loan. 

    In this case, the borrower will guarantee the loan with an asset of relative value. Should they default, the lender can legally take possession of the pledged asset and sell it to recuperate any losses.

    If a borrower has no asset that they can use to secure the debt, they will be required to provide a co-signer to guarantee the loan.

    A Cosigner's Responsibility

    The cosigner acts as a sort of guarantee for the lender, ensuring that someone is responsible for the debt should the principal recipient default. If this occurs, the lender will contact the cosigner demanding payment. 

    Depending on the terms of the loan, they could require them to continue to make payments or may demand payment in full. Once a cosigner has been contacted to repay the loan, the debt is now their responsibility and any failure to pay off the debt will negatively impact their credit rating.

    How A Co-Signer Can Help You Get Approved

    Simply having a cosigner is not a sufficient condition for approval. The cosigner must have a credit score that meets the minimum requirement of the lender. 

    They will look at his/her credit history, debt-to-income ratio, as well as income and employment situation. 

    Should the cosigner qualify, they can not only help the applicant get approved, but also assist them in other ways as well.

    • Lower Interest Rate: If the cosigner has a good credit score, they can help secure a lower interest rate than an individual with bad credit otherwise would be entitled to.
    • Increases The Chances Of Approval: Because the cosigner acts as a form of guarantee, the lender is much more likely to approve the loan if the applicant can provide a cosigner with high creditworthiness.
    • No Need For Securing Asset: Those with poor credit are often required to provide some form of collateral to guarantee a loan. With a qualified cosigner, this requirement is often waived. This can speed up the process and removes any possibility that the borrower can lose an important asset.

    Conclusion

    A cosigner can help individuals who otherwise would not be approved for a consolidation loan. It can also result in a lower interest rate and more favorable terms since it improves  the risk profile for the lender. This being said, staying current with payments is the responsibility of the recipient. Should they default, it will still be recorded on their credit report. 

    Having a cosigner can ruin relationships with friends and family should the recipient default on the loan, leaving the cosigner to bear the responsibility for the debt. Accordingly, be especially careful with who is selected for this role and that they acknowledge all the potential risks of cosigning.