What You Should Know About Debt to Income Ratios
Debt-to-Income (DTI) ratio is a personal finance measure that helps in identifying your debt payments in comparison to your overall income. It is...
You went to apply for a loan, positive you would be approved, only to be told by the financial institution that you need a cosigner. That can feel like a blow to your confidence. You may even be wondering what a cosigner is exactly. How do you choose someone to be your cosigner, and more importantly, what can you do if you can’t find a cosigner? Here we layout the basics of needing a cosigner for your loan.
A cosigner on a loan means that if you default on your payments the person who cosigned on the loan with you, pledges to take responsibility to make the loan payments on your behalf. They sign all the same loan paperwork you do and will be held accountable for the loan, just as you are. This is basically a safe-guard for the financial institution that the loan will not default.
It’s important to note that if you do not make the loan payments on-time both you and your cosigner’s credit scores will suffer for it. So asking someone to be your cosigner is not a small request to make of someone.
Generally, a cosigner is only needed when your credit score or income may not be strong enough to meet a financial institution’s underwriting guidelines. If you have a stronger credit score, typically 650 and above, along with sufficient income to cover the loan payment, it’s likely you will not need a co-signer.
Being asked to provide a cosigner is not a bad thing. There are benefits to having a cosigner on a loan. Having a cosigner can help you obtain loan terms that you may not have been able to be approved for on your own. For example, a strong cosigner can help you obtain a better interest rate or term for the loan.
For example: Let’s say you’re credit score is 590, you’re interest rate could be anywhere from 10-15% for your loan. If you add a co-signer with a credit score of 720, then you’re interest rate could instead be anywhere from 5-7%. That's a lot of savings.
In some cases, you may even be able to borrow more, depending on the strength of your cosigner. If you are asked by your financial institution to provide a cosigner for your debt consolidation loan, that is not necessarily a bad thing. Just make sure you choose a reliable co-signer.
The purpose of a cosigner it to make your loan less risky for the financial institution you’re choosing to work with. So, it is important to keep two key things in mind when looking for your cosigner.
When asking someone to be your cosigner it’s best to ask someone you trust and who trusts you, likely it would be a family member or close friend. Don’t be surprised if people are hesitant to cosign for you, it is going to be up to you to convince them that you can be trusted to make the payments on time. You will need to be upfront and honest with them about the following points:
The more detailed information about your situation and the loan you can provide to your potential cosigner the more likely they may be willing to help you. Don’t be discouraged if everyone on your list of potential cosigners decline to help you, again this is no small request you’re making. There are additional options to try to get approved for your loan even if you can’t find a cosigner.
Finding a cosigner for your loan is not an easy task. Even if someone is financial capable of being a cosigner it doesn’t mean they are willing to put their credit score on the line for you. So, what options do you have if you can’t find a cosigner for your loan? Luckily, there are a few things you can try:
Being asked by your financial institution to provide a cosigner is actually better than being flat out denied. When a financial institution is asking for a cosigner it simply means your credit score and/or income need to be higher to qualify for a loan. So, the person you ask to be a cosigner should have both a higher credit score and higher income than you do to make them a reliable cosigner. If you cannot find a cosigner for your loan, you need to find an alternative way to raise your credit score or increase your income in order to qualify for your loan.
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