When you are applying for a loan, the first thing they look at is your credit record. Lenders, such as banks and credit unions, will only approve loan applications from those with solid credit history and an adequate income. This is to ensure the highest probability of the loan being repaid. But what if you don’t have a good credit record and you need money to cover an emergency expense? In that case, you will need to apply for a bad credit loan and convince someone to be your co-signer.
What Is A Bad Credit Loan And What Is A Co-Signer?
A bad credit loan is a kind of loan designed for people with a poor credit record. Instead of using credit score as the main assessment criteria, lenders would look at the individual’s financial situation and income.
A co-signer refers to someone who pledges to take responsibility for your loan and pay it back if you are unable to. This person would most often be a family member or a close friend because co-signing for someone is a huge risk with very little reward. An eligible co-signer would be someone with a good credit record and a strong income to pay back the loan if you do not.
Why Do Lenders Need A Co-Signer?
Lenders typically require a co-signer when the applicant has a bad credit record. This is done to reduce the risk they are taking. Having an extra person responsible for the loan means that the chances of it being repaid are higher.
Are You More Likely To Get Approved For Your Loan With A Co-Signer?
The answer is yes! As mentioned earlier, having a co-signer with a good credit record and strong income will make you a less risky prospect in the eyes of the lender. Thus, you are more likely to get approved for a bad credit loan.
When Should You Consider Using A Co-Signer?
You should not take out a bad credit loan for unnecessary expenses. The risk involved is not worth it for both you and your co-signer. However, there are some situations in which it makes sense to do so.
Emergency expense is probably one of the most common reasons to take out a loan. Whether it is hospital bills or auto repair bills, you usually don’t have a choice but to take out the loan using a co-signer.
Consolidating high-interest debt is another justifiable reason to take out a bad credit loan. Using a co-signer might help reduce the interest of your loan, which could be used to pay off debts with higher interests such as credit cards.
When expecting future income, such as if you are graduating college or starting a new career, taking out a co-signed loan can be a good idea to help you transition from a low-income lifestyle to a steadier one.
What Pros And Cons Are There To Having A Co-Signer?
Using a co-signer could benefit you in many ways. Firstly, having a co-signer could help you get approved if you have a bad credit score as lenders will see you as less risky. This lower risk could result in you being offered more favorable terms such as lower interest rates.
Having a financially strong co-signer could also speed up your loan application process as no additional reviews or extra documents are needed. This could also mean that you will be eligible for bigger loans.
On the other hand, using a co-signer could also result in ruining his or her financial situation. The co-signer will legally be required to repay the loan, including any late fees incurred, if you fail to pay it back. Both your and their credit scores will also be negatively affected if you miss installment payments. This could end up straining your relationship with your co-signer. That is why you need to make sure you will be able to pay back the loan in the future.