If you've got bad credit, it may be difficult for you to get approved for a loan.
Most lenders, especially the traditional ones, will look at your poor credit standing unfavorably when making a decision.
So even if you can find a lender that's willing to give you the money you need, the terms of that loan may not be in your favor.
You could end up paying a significant amount of money in interest charges over the entire lifetime of your loan.
These costs can end up burdening you, so it may not be worth it for you to take out a loan in the first place.
Regardless of your situation, it's important for you to understand that you're not out of options.
Just because you personally have bad credit doesn't mean you won't be able to get a loan.
One of the top options for you to consider is applying for a loan with a co-signer.
Some of you may have heard of this term, but are unfamiliar with how it works.
It's ok if you're not an expert on the topic just yet.
Whether you have a fairly good idea of how a co-signed loan works, or it's something completely new to you, I'll explain everything you need to know before you get started.
This guide will serve as a great reference for people with bad credit who need to secure a personal loan with favorable terms. Let's dive in.
What is a Co-signer?
Co-signers vouch for the borrower
Let's start with the basics.
The idea of a co-signed loan is pretty simple. If you have bad credit, getting a loan may not necessarily be a walk in the park.
Adding a co-signer to your loan application will make the terms more attractive to a lender. If a lender is unwilling to give you money due to your bad credit, approaching them with a co-signer who can vouch for you increases their confidence that you'll be able to repay the loan despite your poor credit.
But the co-signer does much more than just verbally vouch for the borrower.
By co-signing a loan, they agree to pay the debt if you fail to do so.
Co-signers are equally responsible for full repayment to the lender.
Co-signing can be done physically, meaning in person with a pen and paper, but it can also be done electronically, through online lenders that accept a co-signer.
The reason why having a cosigner increases your chances of getting approved is because the lender perceives this as less of a risk.
Lenders feel that someone with bad credit won't be able to repay the loan, but a co-signer taking on the same responsibility significantly reduces that risk.
Why You Need a Co-signer
Reasons why someone would need a co-signed loan
So we already know that a co-signer is a great option for people with bad credit.
You may even have some financial regrets that negatively impacted your credit score.
But that's not the only reason why people would consider getting their loan co-signed.
In addition to having bad credit, having little to no credit would be a reason to look for a co-signer.
In order to determine your credit score, financial reporting agencies need to look at your credit history.
That's why it's important for you to always monitor your credit score, so you have an idea of where you stand.
If you don't have any credit cards, don't own a vehicle, don't pay rent, don't have a mortgage, and you've never had a loan before, a score may not be generated.
If a lender looks at your report and doesn't see any credit history, you could be perceived just as risky as someone with bad credit.
I know this may seem unfair since you haven't done anything wrong to deserve this, but lenders prefer not to lend to people without a proven track record of paying debts well.
They simply do not want to take these kinds of risks.
So young adults may need to look for a co-signer because of these factors and their thin credit history.
Your income plays a factor in this as well. Depending on how much you're looking to borrow, a lender will want to see proof of income to be certain that you can pay back the loan.
Lenders will take a look at your debt-to-income ratio, which calculates the percentage of your income being paid toward debts.
Higher debt-to-income ratios may require a co-signer.
For those of you who are out of work or don't make enough money to meet the monthly payments, a co-signer would likely be necessary for approval.
Another reason why you may consider a co-signer is if your lender suggests it.
If it comes from their mouth, that may be their way of telling you that you won't get approved if you apply for a personal loan on your own.
Applying for a loan with a co-signer is also a great way to help you build your credit.
Making payments on time will slowly but surely improve your credit score, whether you have no credit or bad credit.
What to Look For in a Co-signer
Find someone with a better credit history than yours
Just because you found a co-signer doesn't automatically mean you'll be approved for the loan you're looking for.
If you find someone who's willing to co-sign your loan, but they also have bad credit, it's not going to help your cause.
Lenders will see this as a risk and offer you high-interest rates or potentially reject the loan application completely.
Instead, make sure you find a co-signer with excellent credit. The higher their credit score is, the greater chance you have of getting approved.
Plus, the loan terms will be in your favor.
Don't just ask someone if they have good credit and take their word for it.
Even though most people believe that their score is average or above average, you should still ask them to show you their credit score and credit report.
This can be a delicate conversion since they are the ones doing you a favor by co-signing your loan.
But I believe they would see the situation from your point-of-view if they know how important this loan is to you.
So just make sure that you ask politely and don't make it seem like you're bossing them around. If you offend them, they may ultimately back out of being your co-signer.
Just explain how important this is to you, and you just need to verify the credit score before you apply.
Make sure your co-signer qualifies for the loan
So you think you found a co-signer that will help you get approved for a bad credit loan—that's great news!
But before you apply for a loan, you need to make sure that the co-signer qualifies.
Review all of the requirements, such as the minimum credit score or income before you consider applying.
Furthermore, you need to also make sure that your lender accepts applications with a co-signer.
If not, you'll need to keep looking.
Find a lender and type of loan that allows you to do this based on your co-signer's qualifications.
So refer back to what we previously discussed about asking your co-signer to show proof of their credit score, which will save both you time when it comes to applying.
Let's take this concept one step further.
Just because your co-signer qualifies for a loan, it doesn't mean that you should automatically apply for it. Why?
Well, not all loans are the same, so don't apply for a loan unless it fits your needs.
For starters, take a look at the amount.
If the loan being offered is too much, then you might have trouble paying it back based on your income and financial situation.
But if it's not enough money, then it won't help you with whatever it is that you need the money for. Make sense?
You need to be sure that you'll be able to make your monthly payments for whatever loan you decide to apply for.
The bottom line is this: Don't just apply because you found a lender that accepts co-signers and the co-signer qualifies.
You need to take other factors into consideration.
It's in your best interest to shop around with other lenders to see if you're getting the best loan terms for both you and your co-signer.
Remember, the co-signer is equally responsible for repayment, so they need to be comfortable with all of the terms as well.
How to Find a Co-signer
Asking someone to help you secure a loan
Now that you understand how co-signed loans work, it's time to learn how to find someone who'll be happy to put their name on the dotted line next to yours.
This can be a challenge because, in general, people don't like taking on additional liabilities.
When it comes to money, these types of conversations can be a bit awkward, so it's important for you to be direct and just ask.
Don't withhold any information.
Fully disclose all of your reasons for needing help.
If you have bad credit, explain to them what factors ended up hurting your score.
Tell the prospective co-signer about your current income and other personal financial information that shows them that you're willing and able to repay the loan by yourself.
Let them know that it's simply the sheer technicality of your credit score not being the right number that is the reason for you asking them to co-sign.
This will help put their mind at ease that they won't have to pay back the loan due to a situation where you are no longer able to pay.
Tell them exactly what you need to use the borrowed money for.
These are the most common reasons why people apply for a personal loan, so if your reason is on the list, there is a good chance that it's justifiable.
Your best bet is to start your search with your closest family members.
Ask your parents, siblings, and grandparents.
You could even ask your aunts, uncles, or cousins for help as well, depending on your relationship with them.
If you have a strong relationship with these people, they may be more willing to help you out.
Just be prepared to answer any questions that the prospective co-signer might have about the loan.
It's your job to know all of the details.
If you're unable to answer their questions, they may be hesitant to help you out because you appear unprepared.
Don't be surprised or discouraged if this conversation doesn't go as well as you planned.
Some people just aren't comfortable with this.
When someone tells you no, it doesn't mean that you should completely give up on your search.
You're not asking for a small favor, so just realize that not everyone is willing to take on this type of financial liability for your sake.
Don't take it personally and let it affect your relationship with whoever you asked.
Just move on to the next person and try your luck again.
Educate your co-signer
Make sure they fully understand their responsibility
Don't be deceitful when you're looking for a co-signer.
Telling them that you need help getting money and all they need to do is come to the bank to sign something isn't fully disclosing the terms.
There are risks involved for the co-signer, and it's your job to explain this to them.
Needing a loan is normal and nothing to be embarrassed about.
Lots of other people have taken out personal loans.
In fact, the number of Americans with a personal loan is at an all-time high.
As I explained earlier, your co-signer is also responsible for repayment of the loan.
If you can't pay back what you owe to the lender, at least on paper it becomes their job to do so.
You have to bear in mind that the co-signer's credit is impacted if you fail to repay your debt, so if you let them down, it could potentially impact their ability to secure a loan of their own in the future.
If a lender sees that your co-signer might have to pay another loan that they co-signed, it could be the difference between them getting approved or rejected based on that risk.
Furthermore, the co-signer's credit score will take a plunge if the loan isn't repaid.
These marks could hurt their credit history in multiple ways.
In addition to having trouble getting a loan, they may even have problems getting approved for a new apartment lease, or anything else that's related to their credit history.
There could be times when a co-signer is completely unaware that these things are happening.
If you miss payments or you're late a few times, it's not like the co-signer will be immediately notified.
They are trusting you to keep your word.
Their credit score could be damaged due to your actions and without them even knowing it.
Don't get me wrong; I'm not saying these things to try and scare you away or deter you from getting a co-signed loan.
In fact, I encourage you to apply for a co-signed loan. It's a great way to borrow money with bad credit and improve your personal credit score at the same time.
But when money gets involved between two people, it can damage relationships, and I personally believe that relationships with friends and family are more important than money.
So both you and the co-signer need to be aware of all of this before you make this type of legal obligation with a lender.
Benefits of Using a Co-signer to Secure a Bad Credit Loan
Ultimately, finding a co-signer will increase your chances of getting approved for a loan if you have bad credit.
As a result, not only will you be able to secure the funds that you need, but you'll also be able to repair your credit by making monthly payments on time.
Co-signed loans are also a great option for young people who have no credit, or a thin credit history.
But before you proceed with this, just make sure that you find a loan that fits your needs.
Look for loans that the co-signer will qualify for.
Make sure that both you and the co-signer understand the terms of the loan and the equal responsibility for repayment.
Have you had success getting approved for a loan with a co-signer?
Tell us about your experience in the comments.