A debt consolidation loan may be a good option to reduce monthly payments and reduce interest expenses. However, those with poor credit may have difficulty obtaining a loan and may be asked by their lender to get a cosigner. A cosigner is someone who jointly applies for the loan with you and commits to paying off the debt should you fail to make payments.
What Is A Debt Consolidation Loan?
A debt consolidation loan is used to pay off several debts. When you take out a debt consolidation loan, you can use the funds from the loan to pay off all other existing loans. That way, you’ll be left with just one monthly payment rather than several.
This type of loan is more common among consumers who have several high-interest loans and want to simplify their finances. It can also save money if the rate associated with the loan is lower than the other loans paid off through the new loan.
What Do You Need To Get A Debt Consolidation Loan?
To qualify for a debt consolidation loan, you’ll need the following:
- Good Credit. A credit score in the mid-600’s is generally the minimum required to get approved for a debt consolidation loan. However, the exact number will vary based on the lender. Some lenders may accept a score as low as 580, but you’ll likely need to offset this lower score with a high income.
- Sufficient Income. Your income will need to be high enough to be able to cover your debt consolidation loan payments. Your lender may also look at your other financial obligations to make sure you have enough income to cover your debt consolidation payments.
Why Would You Need A Cosigner For A Debt Consolidation Loan?
If you’re unable to secure a debt consolidation loan, you may have the option to add a cosigner to increase your odds of approval. Cosigners agree to take over the loan payments if you default at some point.
Your lender will first assess the risk they’ll be assuming before they approve your loan. If they believe you’ll be too much of a risk, they may deny your loan application.
A cosigner can help bridge the gap and help you get approved for a debt consolidation loan if you’ve been denied for any of the following reasons:
Low Credit Score
As mentioned, your credit scores play a key role in your ability to secure a debt consolidation loan. If it’s too low, you risk having your loan application turned down. A cosigner with healthy credit can minimize the risk for the lender and improve your odds of loan approval.
Insufficient Income
If your salary level doesn’t meet the lender’s requirements you may be denied the loan. Similarly, if you’re self-employed, your income may not be considered as stable as a salaried employee. This may also lead to a denial. By adding a cosigner you’ll be reducing the risk your lender takes. The risk is reduced because they will take over the payments if you default.
High Debt
Even if your income is high, you may have too much debt that takes up the majority of your paycheque. Again, this can lower your chances of loan approval on your own. But with a cosigner, you might have a better chance of getting approved.
How Does A Cosigner Help?
Having a cosigner can come with the following advantages:
Higher Chance Of Loan Approval
If your current income and credit are not strong enough to secure a loan, you may need outside help. Having a cosigner can mean the difference between an approved and a denied loan application.
Lower Interest Rate
If you can get approved for a loan, you might still be charged a higher interest rate if your financial and credit profile is weak. Adding a cosigner with a strong income and high credit can reduce the risk for the lender. This, in turn, may lead to the lender offering you a lower interest rate in return.
Higher Loan Amount
Your risk profile will also determine how much of a loan you can get approved for. With good credit and high income, you may qualify for a higher loan amount, but the opposite is also true. If you need a larger loan amount, a cosigner may help you get approved for more.
Who Would Make A Good Cosigner?
Your cosigner should be someone you trust that has a good credit score and credit history. Lenders need to see that they have a good track record of repaying their debt as a cosigner’s responsibility is equal to that of the borrower should they default on their payments.
If the borrower defaults, the cosigner will be asked to either continue making the regularly scheduled payments or to repay the loan in full. They will also be subject to the same penalties or late fees that the borrower is under the terms of the loan agreement.
Debt Consolidation Loan Alternatives
Debt consolidation loans require average to good credit or the help of a cosigner who has good credit. If you are unable to meet these requirements, you may not be able to get a debt consolidation loan. In such cases, you may want to consider some of the following alternatives.
Debt Consolidation Program
With a debt consolidation program, you’ll work with a credit counsellor to create a plan and timeline for paying back the total amount of debt you owe to your creditors. Often times your counsellor will be able to negotiate a lower interest rate or fee reduction, but you will need to pay off the total principal of what you owe.
Once your creditors agree to your repayment plan, you will make payments to your counsellor who will then distribute the money accordingly. Consumers who choose to work through a program like this are typically debt-free within 3-5 years.
Credit Card Balance Transfer
If the majority of your debt is high-interest credit card debt, then a balance transfer could be a great option for you. The goal is to find a balance transfer credit card that offers an interest-free introductory period of at least 6 months and then transfer your current balance to the new card. This way you’ll have at least 6 months to pay off your credit card debt without accumulating more debt because of a high-interest rate.
Consumer Proposal Or Bankruptcy
For those consumers who are struggling with poor credit and they cannot afford to repay their debt on their own, a more drastic option may be necessary. A consumer proposal or bankruptcy should only be considered with the help of a Licensed Insolvency Trustee (LIT) when all other options have been exhausted.
Both of these options are a last resort but can help transform the financial situations of those in need. If you’re considering a consumer proposal or bankruptcy it’s in your best interest to speak with a LIT right away.
Bottom Line
Working with a cosigner can be a great way to get approved for the debt consolidation loan you need, but it is not the best option for all consumers. If you’re struggling with excessive debt and aren’t sure how to handle it, consider speaking with a credit counsellor first. This is one of the best ways to determine what type of help you need.
