Most people today are fully aware that they need to be able to minimize their debt in order to achieve financial freedom. While avoiding taking out expensive loans and credit cards should be avoided, there are situations in which taking out a loan is a necessity. Whether it is to buy a home, finance an education, or get a car, there will come a time in which you need to take out a loan.
If you are looking to open up a new credit account or take out a loan you will likely start the process by applying in your own name. However, there could come a situation in which you need to have someone also sign the loan agreement along with you. In these situations, the cosigner will also be taking on responsibility for the loan. There are several situations in which having a cosigner could be necessary.
No Credit History
One of the most common situations in which you will need to have a cosigner is if you do not have much credit history. All people need to start their credit history somewhere. While all people can have the best intentions of paying back a loan as agreed, those that do not have a long credit history could struggle to be approved for loans. This most commonly happens to young adults and other individuals that have not relied on credit much in the past. If you do not have a long credit history, getting a cosigner could help you qualify for a loan and get a good interest rate.
Poor Credit History
While having no credit history can be a disadvantage, having poor credit can also hurt your chances of getting a loan on your own. If you have a history of either being late on payments or defaulting on loans you likely will have a low credit score. In these situations, a lender will likely want you to get a cosigner that has a higher credit score. This will give the lender comfort that someone with a good credit score is also taking on responsibility for the payment if you happen to default.
More Income Needed
Beyond having a good credit score, you will also need to have an income that can support the loan payment that you are taking out. All lenders will quickly assess your current income stream, personal expenses, and the loan payment to figure out if you can afford the loan. You can also do this by using tools online. For example, a car loan calculator will not only tell you the payment of your loan each month but it could also help you to start the process of identifying your total personal debt to income ratio. If it is determined that your debt to income ratio is too low, or if your income is not considered reliable or sustainable, the lender may require that you get a cosigner that has a more stable source of income.