If you're seeking a loan but have a poor credit score, no credit history or an income that's too low to qualify independently, you may ask another party to serve as a co-signer. A co-signer assumes responsibility for the loan in the event you fail to pay loan installments. To qualify as a co-signer, a person must have a solid credit rating, as well as proof of income.
Who Needs a Co-Signer?
Young people, students and adults without a solid credit history or income stream often need the help of a co-signer to qualify for a loan. You may ask a trusted family member to serve in this capacity. It's advisable to discuss potential areas for friction before entering this type of agreement to ensure family harmony.
Your co-signer should have a credit score of at least 700. In essence, a co-signer is qualifying for a loan just as if it were his own. Your co-signer may be asked to show proof of income via previous tax returns, paycheck stubs or even bank statements. When a person co-signs for you, he agrees to the same terms as you, the primary signer.
Lenders will consider both your credit rating and your co-signer's credit rating in setting interest rates and terms. The higher the scores, the better the terms.
While having a co-signer with a credit score lower than 700 doesn't necessarily mean a loan will be denied, it will mean a higher interest rate and possibly a bigger down payment.
Checking a Potential Co-Signer’s Credit
If you're considering using a co-signer for a loan, you'll want to know that individual's credit score before applying. While it's not possible to access someone's credit history without her permission, you can ask her to request a free credit report from the government. If a potential co-signer is uncomfortable sharing this part of her financial history with you directly, ask her to meet privately with a loan officer and get back to you with details about her eligibility as a co-signer.
The person who agrees to be your co-signer may be unable to qualify for other loans on his own and potentially risks his own financial health on your behalf.