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It can be difficult to get a loan without a good credit history. If you’re having difficulty getting approved, you may need to find a co-signor to strengthen your application. From time to time we may all need a helping hand and sometimes getting a helping hand could be finding someone to act as a co-signor on your loan.
What Exactly Is a Co-Signor?
A co-signor is somebody who agrees to apply for a loan together with you and to pay off the debt if you don’t make your payments. The co-signor signs the loan agreement with you (hence the name) and provides the lender with an extra level of assurance that the loan will still be repaid if you are not able or willing to repay it. For example, a friend may help you to get approved for a loan by promising to make the payments if you don’t.
Asking someone to be a co-signor can be a big request since you are asking that person to accept a financial commitment on your behalf because they are legally responsible for paying back your loan if needed. For this reason you need to think carefully about who you plan to approach as a potential co-signor and how to go about asking them.
Why you may need a co-signor
Each lender has its own criteria in deciding who they can safely lend to. If for some reason you don’t meet the lender’s criteria, sometimes instead of rejecting your application they may offer you the possibility of brining a co-signor to make your application stronger. This reduces the risk for the lender and ensures you get the credit you were looking for. It can be a win-win scenario for everyone as long as you respect your obligations and the co-signor is fully aware of their responsibilities.
Some of the factors the lenders look for and could determine whether you will need a co-signor include:
Credit Score
Your credit rating, or credit score, gives lenders a simple overview of how reliable you are in repaying your debt. There are many different factors that determine your credit score but the most important one is your payment history. If in the past you have had difficulty repaying your other obligations, lenders may see you as too risky and may need a co-signor to back you up. To learn more about credit scores, refer to our available resources about credit score.
Income
Ultimately lenders want to know if you can repay them and one of the strongest indicators of that is to look at your income level and how stable it is. It is common for lenders to calculate a debt-to-income ratio to assess your eligibility. This is used to calculate how much of your total income goes toward all your other debt obligations, and this in turn tells lenders if you are able to take on any additional debt. If you already have too many other obligations, then you may need to find a co-signor.
How to Find a Co-Signor
The ideal co-signor is someone who knows you well, has extra income to absorb your loan, and who is an experienced borrower
You should remember that asking someone to be a co-signor is not a small request since the co-signor will be taking on a financial commitment and placing a great deal of trust in you. Therefore, you need to think hard about who you ask.
Usually a good place to start is family members since they know you the best and would like to see you succeed. They are more likely to help you out in a time of financial need and may also be more forgiving if there are any issues with your repayments.
However, you should make sure the family member you are asking has enough income to be able to make the loan payments if something goes wrong. They would also need to have a good credit rating, as otherwise they are not likely to be approved as a co-signor.
Another option to consider would be good friends or close colleagues, but again you should make sure they are standing on solid financial ground and are willing and able to make your loan payments if that becomes necessary. Obviously having a conversation like this with a friend can be tricky so you should think carefully about who you approach.
If you are able to find a co-signor, take responsibility. Remember they are doing you a big favor and enabling you to achieve something you were not able to do on your own. Show your appreciation by making sure you repay the debt in full and on time so they don’t end up regretting helping you. If this means making some sacrifices and working more, then that’s what you’ll have to do to make sure the debt is paid off.
Convincing someone to be your co-signor
Like most things in life, doing your homework first increases your chance of success. So, before you have the conversation, make sure you are well prepared and able to answer the questions your co-signor may have. This will increase their comfort level and their confidence in you.
Here are a few things you can do to increase your chance of success:
1. Be prepared
Make sure you know all the key details of the loan. This way the co-signor will feel more confident in you.
2. Be upfront and transparent
Tell your co-signor about your financial history and any challenges you have faced in the past. They deserve to know all the key pieces of information if they are going to act as your co-signor and would not want any surprises.
3. Show them you understand how the loan works
If you show them you clearly understand the key features of the loan, such as the interest amount and repayment schedules, you will increase their level of confidence in you and your commitment to repay the loan.
4. Tell them how repaying the loan can help you build credit
If you have had challenges in the past resulting in a bad credit history or no credit history, a new loan can help you build your credit- as long as you make your payments on time. Communicating this to your co-signor could help bring them on bard. Learn more about your credit rating.
5. Let them know you take this seriously
They need to know that you appreciate what they are doing for you and you understand you can cause them financial loss if you don’t respect your loan repayment schedule.
6. Acknowledge and Discuss the Risks
Your co-signor needs to know that you are as serious about credit as they are. Plus, informing them about their risks is the right thing to do.
What if you can’t find a co-signor
Sometimes it may be difficult to find someone who is willing to act as a co-signor. This is understandable and you should not take it personally. Most people have other financial commitments, including servicing their own debt and may not have the ability to accept the risk of having to repay another loan.
If you have difficulty finding a co-signor, you may need to consider other options. Here are some proven strategies that can work in your favour:
Build Credit
You can proactively take steps to improve your credit profile. By doing this you will increase your chances of being approved for credit on your own and without a co-signor. An added bonus is that you may also qualify for credit at lower interest rates and save money. Our financial education section is packed with information and tips on how you can improve your credit. There are also specific products that can help you build or rebuild your credit that are easy to qualify for. These include credit builder loans and secured credit cards.
You may be able to open a secured credit card without a co-signor. Secured cards require a deposit, but using such a card wisely can build up your credit to help you qualify for a better credit card or loan in the future.
Apply for a secured loan
Getting a secured loan means you pledge collateral as security for the loan. This could be a good option if you own something of value, since you may be able to borrow against the value of your asset. Lenders are looking for security, whether it’s a co-signor or an asset that they can take and sell to recover their money. Keep in mind this can be risky since you may end up losing your asset. For example, you could lose your home or your vehicle if you are not able to repay the loan.
Borrow a smaller amount
Although this might not be ideal, this could make it easier to get approved since a smaller loan means smaller payments and the lender may feel you have a better chance of servicing your loan.
Pay for a Co-signor?
You may come across services and individuals that offer co-signing services, where you would pay for somebody to co-sign for you. Be careful when it comes to such services. You need to ask yourself how this would make sense for the person acting as co-signor since you would pay a modest fee and that person could be responsible for paying off the entire loan.
As with many things in life, if it sounds too good to be true, it probably is. You may find people promising to co-sign on sites like craigslist, but these may be scammers. Beware of anybody asking for your banking details and similar information, or those asking for up-front payment with no way to make sure that they would honour their part of the deal.
We hope you find the information in this guide helpful in making the right decision, whether it’s to find a co-signor or to put you plans on hold and work on improving your credit. Our friendly advisors at Finjoy are there to help you, so feel free to get in touch with us!
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.
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