People with a poor credit history are less likely to get approved for a loan. One of the essential factors that determine the lender’s trust is the applicant’s ability to pay on time – which is reflected by your credit rating. One of the ways to overcome this limitation is by applying for a co-signed loan. What this process does is to allow another person’s credit history to vouch for you.
What is a co-signed loan, and how does it work?
The good thing is, having poor credit does not leave you without an option. Many reputable lenders today offer some of the best online loans with cosigner options. A co-signer is a person who shares financial responsibility. This person accepts the possible risk that when you can no longer pay for the loan, they will have to take primary liability with the lender. Of course, your co-signer will have to trust and consider your commitment to pay back the obligation before agreeing to sign on the dotted line.
When is it suitable to get a co-signed loan?
Rebuilding your credit rating is a challenging task. It would help if you had activities recorded in your credit report that show your ability to pay on time. Unfortunately, a poor credit history will not get you much further when applying for credit cards, loans, or lines of credit. And when it comes to personal loan applications, it gets more complicated because this type of product is riskier for the lender.
Personal loans don’t require collateral. As such, the lender can only go by your credit rating as a mark of your ability to pay back what you owe. While other factors, such as your income and debt ratio also matter, bad payment history will eventually lead to a denied application.
In these circumstances, a co-signer is your best option of proving to that lender that there is someone who can vouch for you. Applicants with good credit, but insufficient income may also use a co-signer to meet the lender’s requirements.
What are the benefits of applying with a co-signer?
In addition to increasing your chances of getting approved, there are also other benefits when you apply for a loan with a co-signer:
- Better loan terms and lower interest rates. The riskier the borrower, the higher the lender’s interest rates. A co-signer will help lower the risk you pose to the lender, hence possibly raising your chances of getting offered more favorable interest and loan terms.
- A chance to raise your credit rating. When your credit rating is low, you need every chance available to raise it. A co-signer is leverage you can use to get approved for products that can help you build a good payment history.
Indeed, a co-signed loan appears to be one of the most suitable options to get approved if you have poor credit. It is certainly not the only option, but if you have someone willing to help, you can take advantage of the opportunity as long as you ensure that you will commit to paying on time and avoid compromising your co-signer’s finances.