If you’re in the market for a loan but your credit history is less than stellar, it may be worth your while to consider co-signing a loan. In addition to making strides to improve your credit score, signing for a loan with someone else–generally a friend, family member, or loved one who has a better credit score–has many benefits. Here’s what you need to know about co-signing a loan.
Benefits of Co-Signing a Loan
There are three main benefits for potential borrowers looking to co-sign a loan. First, co-signing a loan can improve your likelihood of getting approved for a loan. Second, you have the potential to score a lower interest rate on your loan. And third, it can give you access to a larger loan amount. Let’s dive into these benefits.
Higher Likelihood of Loan Approval
If you’re rebuilding your finances or have a poor credit history, having a co-signer with a good credit score can be a huge advantage. Say you have a major purchase coming up and you applied for a personal loan with your local bank – only to find out you didn’t get approved since your credit score is low. By getting a co-signer, your chances of being approved for a loan are higher considering you’re partnering with somebody who has a healthier credit history. Applying together can increase the chances you’ll be approved, since it poses a lower risk to lenders.
Securing a Low-Interest Rate
Interest rates tend to be much higher for those with a less-than-perfect credit history because lenders assume they’re more likely to default. Essentially, the higher the risk, the less likely a lender is to lend to you. But with a co-signer, you’re not only more likely to get approved for your loan –you might be able to score a lower interest rate in the process.
For example, let’s say you and your spouse are looking to take out a loan to put toward some home improvement projects. You, however, have a ton of student loan debt under your belt. That debt has adversely affected your credit score over the years, bringing it down from excellent to average. However, your spouse is in great financial shape and has an excellent credit score. By co-signing a loan with your spouse, you’ll reap the benefits of his credit score and will likely be able to score a lower interest rate.
Access to a Larger Loan Amount
As we know, potential borrowers with a strong financial history are more likely to get better terms for their loans. These superior terms include the size of the loan. By co-signing for a loan, you and your co-signer reap the benefits of two people’s financial history – especially if you’re trying to borrow with a less-than-perfect credit score. This means the amount of money you can borrow on your loan may be higher when co-signing a loan and you can have more cash to dip into when you need it.
Before Co-Signing a Loan, Understand the Process
When you cosign for a loan, you’re letting the lender know that you and your co-signer will share all the loan’s legal and financial responsibilities. In the event of missed or late payments, both borrowers are equally responsible for the amount owed. If you or your co-borrower can’t keep up with payments, you could be sued by the lender, have your paychecks garnished, and even wind up in bankruptcy court.
There are many benefits to co-signing a loan if your financial health isn’t where you want it to be. Keep in mind that once you co-sign, it’s a long process to remove a co-signer from a loan. Make sure you are co-signing with somebody you trust and who understands their financial responsibilities.