For people looking to get a debt consolidation loan with a low credit score with a new personal loan should get a co-signer if possible.
Not only will your lender likely need you to have a co-signer to approve your application, you might also get a better deal with a co-signer with good credit.
However, you should ask yourself if you want a friend or family member to take on the financial risk.
Why Might I Need a Cosigner to Consolidate My Debt?
When you get a debt consolidation loan you will consolidate your high interest debts into a new loan with a lower interest rate.
When you apply for a consolidation loan, your lender will look at the risk they are taking to allow you to receive a new loan to pay off debt you already owe.
When your lender considers whether they should approve your debt consolidation loan they will look at your income, current debt load and finally, your credit score.
You might need a cosigner if you have a lack of income, too much debt, or a low credit score.
While the consolidation loan company is in the business of lending money, they also want to ensure they will be repaid.
If your income is insufficent to cover the required monthly payments on your debt consolidation loan, your lender will likely require you to have a co-signer.
People with a sufficient level of income but are self-employed or paid through commissions, might also have trouble getting approved for debt consolidation without a co-signer.
High Levels of Debt
While debt consolidation is intended to deal with debt problems, if you have a high level of debt, the lender may refuse to approve your application to consolidate your debts if they feel the debt level you are carrying is too high.
Debt consolidation simply means you are moving your debt from other lenders to your new lender and high debt loads can make your lender weary.
Low Credit Score
Even debt consolidation lenders want to loan money to someone who has a solid history of borrowing and repaying money.
If you have a bad credit score, your lender will likely determine you are a risk for defaulting on your debts in the future.
Your lender will want you to have someone with a better credit score guarantee repayment in the event you do not have the ability to repay the loan.
How Can a Co-signer Help Me Get Approved For a Debt Consolidation Loan?
The cosigner will help you get your debt consolidation loan approved because they have a better credit score than you.
Additionally, your cosigner provides an extra source of income your lender can look at to repay the loan if necessary.
Finally, your cosigners debt-to-income ratio can be looked at to see if you have the capacity to make payments if you do not pay your loan.
What Are The Benefits of Getting a Cosigner?
If you are able to get a cosigner for your debt consolidation loan, the cosigner can assist you:
- Get a lower interest rate for your debt consolidation loan,
- Secure the loan by providing an asset as security,
- Reduce the down payment you will have to pay towards the loan,
- Increase the chances of your debt consolidation loan applicated being approved.
What Are The Responsibilities of a Loan Co-signer?
Basically, if you default on your loan payments the cosigner will become responsible for repaying the debt.
Should you default on the loan payments, the lender will be able to contact the cosigner and demand repayment.
The lender could ask the cosigner to continue making the monthly payments, or they might be able to demand the full payment on the loan immediately.
If you owe any interest, late fee or penalty charges, your cosigner will be responsible for these charges as well.
This is why it is important to make sure you don’t default on a cosigned loan.
The cosigner will take over for your loan, and it could impact their credit score since they are considered a co-borrower, which means they have also promised payment.
Additionally, the cosigned loan will also appear on their credit report, which means their ability to borrow will be impacted until your consolidation loan is paid off in full.
Before the cosigner can be released from their obligations, you must receive consent from the lender.
Can I Get a Consolidation Loan Without a Cosigner?
Yes, it could be possible and you should always attempt to get a loan for consolidating your debt without a cosigner.
There are benefits of course as discussed above to having a cosigner, but your relationship could be damaged if you are not able to repay the loan as agreed.
Additionally, even if you go bankrupt or make a proposal to your creditors, your co-signer will still be liable for the loan debt.
In certain cases, our Trustees have had to help both the borrower and their co-signer file for bankruptcy.
So, while asking a friend or family member to co-sign for you, there are many dangers to doing so.