We all know how important obtaining a loan can be and how it can significantly impact your financial future, but sometimes it’s not always plain sailing. If you have a lack of credit history, income, budget, or time of employment you will often see yourself needing a co-signer in order to get approved. Let’s find out why you may need a cosigner and the best way to approach the topic.
What is a co-signer?
A co-signer is somebody who acts like a guarantor for your loan. They apply for the loan with you and then agree to pay off your debt if you can’t or don’t make your payments. The co-signer signs your loan application with you and guarantees the loan. A co-signer is there to provide confidence to your lender, allowing for a higher chance of approval since now, two people are responsible for repaying the loan. It’s a big request asking someone to be your cosigner and not an easy conversation to have.
Why do you need a co-signer?
While different loan providers may have different underwriting acceptance criteria, most look at the same general qualifications. Here are the most common reasons lenders may request for you to have a cosigner:
We previously discussed the benefits of a good credit score for loan approval. Your borrowing history is one of the most critical factors. And If your credit history isn’t great, you may not be able to qualify for a loan on your own, regardless if you fit the other lender requirements.
Lenders want to find out if you’ve had a loan before, if you’re reliable at paying them back or if you’ve paid them back on time. They also want to know if you have any open loans that you’re currently behind on. If it’s a case where you’ve struggled in the past to repay a loan, a cosigner can essentially lend you their credit score in order to boost your approval power.
For nearly all loans, your income must reflect your ability to repay your loan. For example, if you earn $50,000 per year; you’ll probably find it difficult to borrow $100,000 to buy a new car. But if a cosigner is willing to use their earnings against your loan application, a lender may be willing to give you the loan.
Steady employment history is important for lenders, especially for long-term loans like mortgages. For example, a lender might want to see that you’ve worked in the same field for at least two years without any breaks. This shows to lenders that you don’t have long gaps of unemployment, or regular job changes, making you a more reliable contender for a loan. If it’s a case where you’ve had unreliable work history, a cosigner may boost your chances of loan approval.
If you have a ton of debts, regardless of other factors, lenders still might reject your loan application. A cosigner can use their own debt-to-income ratio to justify the loan for you.
Negatives of being a cosigner
When asking a relative or friend to be a cosigner, it’s important to be open and honest with them about any downsides, so they can properly consider your request. It’s vital to remember, it’s not a small request to be a cosigner – it comes with big responsibilities and can have major financial complications if the loan defaults to them.
It’s important to let your cosigner know that being a cosigner will show up on their credit history as if they have taken out their own loan. It will increase their debt-to-income ratio and may make it difficult for them to get credit in the future. If there is a late payment on the loan, it may also drastically impact their credit score. They should also note that the person who cosigns may not be able to get a mortgage or car loan in the near future.
Being a cosigner is a long-term, legal obligation. At times, some lenders may release the consigners from the contract pending good, timely payment history – but there is no guarantee this will happen. It’s important a potential cosigner knows that they are legally responsible to take over the loan if the borrower doesn’t.
Need a cosigner for a loan and not sure how to ask them? Check out five tips for approaching the conversation and starting this relationship on a positive note.
Tips for asking a family or friend to be your co-signer
Be Prepared: It’s a big deal for someone to cosign for you so don’t shy away from anything they may ask. Help them make an informed decision, tell them why you need a loan, reassure them and be respectful of any questions they have.
Be Candid: Let them know your exact financial and employment situation. Now is not the time to hide details and be secretive. Your potential must be aware of your ability to repay the loan.
Know the Details: Get an in-depth understanding of how your loan works, the terms & conditions, repayment dates, interest amount and more. Allow them to understand exactly what will happen if you can’t pay. Investigate if there’s a way they can be released from the loan after several on-time payments. Make sure you discuss all the details with your potential cosigner.
Acknowledge and Discuss the Risks: Your cosigner needs to know that you’re serious about this loan, and about all the risks attached. Plus, informing them about their risks is the right thing to do.
Be Honest and Transparent: This one’s important. Tell the truth, even if it’s bad. A cosigner is doing you a huge favour and being transparent and honest is the least you can do.
About Marble Financial Inc. (CSE: MRBL; OTCQB: MRBLF). We are a group of forward-thinking financial technology experts that fully understand the benefits and drawbacks of credit in Canada. Marble helps Canadians rebuild their confidence to gain access to prime lending. Through our industry-leading proprietary technology solutions: Fast- Track, Score-Up, and Credit-Meds. Since 2016, Marble is proud to have empowered thousands of Canadians to a positive financial future. We continue to establish ourselves as leaders in financial wellness.