Banks and other private lenders are constantly coming out with new products that are designed to be accessible to individuals who either have low credit scores or who have an insufficient credit history. The most popular of these is the co-signed loan.
This type of loan is for all intents and purposes. It is a regular loan that must be signed by an additional individual other than the borrower. Through this additional signature, borrowers can use the co-signers’ credit rating to get lower interest rates and more money. However,
What Kind of Loans Can Be Co-signed?
Both secured as well as unsecured loans can be co-signed. If an individual co-signs a secured loan, he will have to put up either a portion of the collateral or guarantee it entirely. Individuals who have low credit scores and need a large amount of money, without having anything to secure the loan against, may get co-signers to offer the collateral.
The most popular type of co-signed loan is a personal loan. However, lenders may also offer home equity loans and even lines of credit or HELOCs. Regardless of the type of loan, the co-signer is assigned part of the legal responsibility for the debt, or all of it, depending on the terms and conditions offered by the lender.
Who Can Co-sign a Loan?
There are no restrictions when it comes to who can co-sign loans; however, ideally, they should be individuals that have a good financial track record and a high credit rating. Furthermore, due to the nature of co-signed loans, the individuals are often family members or people who are closely related to the borrower.
It is important to mention that there are some limitations. However, these have to do with the credit rating of the co-signer, not the loan itself. For example, if a borrower asks a family member to co-sign his loan, then the deal will be marked on both of their financial records as an outstanding debt.
In other words, it will temporarily reduce the credit scores of both the borrower and the co-signer. In some cases, the co-signers’ credit score may be reduced by his debt to such a degree that the bank will not consider him eligible.
Alternatively, if the co-signer tries to borrow money for himself after co-signing a loan, he may find that the lender will offer him less advantageous terms and conditions.
The Advantages of Co-signed Loans for Those with Low Credit Scores
Having your loan co-signer if you’ve got a poor credit rating has several advantages:
· The lender is more likely to approve co-signed loans
If the person that co-signs the loan has a great credit score, your loan request will have a greater chance of being approved, regardless of your rating. This can be invaluable for those who have applied for a loan earlier, but have been turned down by the lenders.
· Co-signed loans have better terms
Most lenders tweak their terms and conditions depending on the credit score of the co-signer. If the borrower has a low credit score but has a co-signer that has had a good financial track record, the lender will offer a lower interest rate. In some cases, lenders may also request less collateral.
· Take out multiple loans at once
Lastly, getting a co-signed loan may enable you to take out multiple loans. Every time an individual borrows money, his credit score will be reduced as a result of the debt. However, having a co-signer can mitigate this effect and allow you to get additional loans.