Getting A Cosigner For A Debt Consolidation Loan
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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.
Purpose Of Getting A Cosigner For A Debt Consolidation Loan
Getting a loan with bad credit is often difficult as lenders may feel that there is a higher risk of you defaulting on the loan. Lenders typically prefer lending to borrowers who have a proven track record of borrowing and repaying their debts. Apart from your credit score, lenders will also look at other factors such as your income and current debt levels.
Lenders evaluate your income to determine whether you can afford monthly debt payments. For those who are independent contractors, self-employed, or earn commissions, a lender may deem that the source of income is not stable enough to support loan repayments. Those who are employed full-time with sufficient income to afford monthly payments may still have their loan application rejected if their total debt level is too high. To reduce the risk of default, lenders may ask the borrower to get a cosigner – generally someone who has better credit with an adequate debt-to-income ratio.
How Does A Cosigner Help?
A cosigner provides assurance to the lender that someone is willing to take responsibility for the debt should the borrower fail to make their payments. The lender will take into account the cosigner’s credit, income, and debt-to-income ratio to determine whether they are eligible.
Having an eligible cosigner when applying for a consolidation loan will likely improve your chances of being approved, as the lender is given the assurance that someone will be responsible for the debt even if you cannot make the payments. Additionally, the lender may charge a lower interest rate as there is a lower risk of both you and your cosigner defaulting.
Who Would Make A Good Cosigner?
Your cosigner should be someone you trust (and trusts you) that has a good credit score and credit history. Lenders need to see that they have a good track record of repaying their debts.
A consigner’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. In order for a cosigner to be released from all obligations for a cosigned debt, they must obtain the consent of the lender. As a co-borrower to your loan, a cosigner’s credit score may also be affected – the lender may report the loan on their credit report which may affect their ability to borrow in the future as they now have a higher debt-to-income ratio.
Should You Get A Cosigner?
Cosigned loans are often student loans, car loans, and low credit consolidation loans. While asking a family member or friend to become a cosigner can help you get approved for a loan, it may also put a strain on that relationship if things don’t go according to plan. As previously mentioned, cosigners are essentially co-borrowers and are held liable if the borrower falls behind on their repayments. A consigner will still be held liable even if the borrower files for bankruptcy. There are cases where cosigners have had to file for bankruptcy or consumer proposals due to the borrower defaulting.
If your lender requires a cosigner, it may be a sign that you should reconsider whether it is essential that you get the loan and what your other options are. You should also work toward resolving the issues on your credit report that required you to get a cosigner in order to be approved. If it is essential that you get the loan, you should seek the help of a cosigner who is financially responsible and is able to continue making payments on your behalf should you run into trouble. It is important that both you and your cosigner understand the terms and conditions of the loan, including the lender’s policies towards missed payments and accounts that are in arrears.
Debt Consolidation Loan Alternatives
As mentioned above, debt consolidation loans require average to good credit or the help of the a cosiner who have good credit. If you are unable to meet these requirements, you may want ot 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 time line for paying back the total amount of debt you owe to your creditors. Often times your counsellor will be able to negotiate a 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 throught 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 leats 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 higher interest rate.
Consumer Proposal Or Bankruptcy
For those consumers who are struggling with poor credit and debt they cannot afford to repay on their own, a more drastic option may be necessary. A consumer proposal or bankruptcy shold only be considered with the help of a Licensed Insolvency Trustee and when all other options have been exhausted. Both of these are options of lats 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 professional right away.
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.
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