If a Co-signer Has Bad Credit, Can a Loan Still Get Approved?

Parents often act as co-signers for their children.

When you ask someone to co-sign on a loan, it's not like asking someone to act as a reference -- you're asking the co-signer to be an equal owner of the loan, even if he receives no benefit from the loan itself. The lender uses your information and your co-signer's information to analyze your credit risk and determine the likelihood that you will pay back the loan. It's vital for your co-signer to have good credit to support your application.

Definition

A co-signer is used when the loan applicant has poor credit or little to no credit history. The co-signer is a security measure for the creditors. If the applicant does not repay her loan, the co-signer agrees to make the payments. The loan application is assessed based on both the applicant's and the co-signer's credit reports.

Credit Score

Since the co-signer's information is used to determine whether or not a lender will approve a loan, the co-signer must have good credit. There is no point to having a co-signer with poor credit, since the lender will assess that neither the applicant nor the co-signer is creditworthy.

Choosing a Co-signer

A co-signer must agree to take on equal responsibility for the loan. As the applicant, you must make sure you make the agreed-upon payments on time, or else the lender will go after your co-signer for the funds. Therefore, it is important that your co-signer also has the financial capability to pay your loan if you do not or cannot pay it because of irresponsibility, health problems, job loss or death.

Considerations

If you need a co-singer because you have no credit, you may build your credit on your own using a secured credit card, which is a credit card that has a limit based on an amount you deposit. Those who have poor credit may be able to improve their credit by asking for lower interest rates on current accounts and working with a financial counselor.

References

• Bankrate: The Basics of Co-signing a Loan
• Bankrate: Loan Co-signer Must Have Good Credit