Debt Consolidation Loans with a Cosigner

Are you struggling with many high-interest debt? Debt consolidation loans allow you to roll multiple debts into one new loan, ideally with a lower interest rate and simplified single payment each month.

However, poor credit can make qualifying for the best consolidation loans difficult. Adding a trusted cosigner to your application can improve the chances of approval and scoring better debt consolidation loans.

But what exactly is a cosigner? And are there downsides to consider before getting someone to cosign a debt consolidation loan with you? This guide covers everything you need to know about cosigners for consolidation loans.

What is Debt Consolidation?

Debt consolidation refers to taking out a new personal loan, and then using the loan funds to pay off and close multiple existing credit card, medical, or other debts. This consolidates the debt into one new loan to secure a lower interest rate and simplified single payment.

The main aims of debt consolidation loans are:

Lowering your interest rate to reduce the total interest paid over time, saving potentially thousands of dollars.
Simplifying finances by tracking just one payment and due date versus multiple different accounts.
Providing a clear repayment plan so you can become debt-free faster.

While powerful for reducing interest costs, you have to be careful not to rack up new credit card or other debts after consolidation. Discipline is required to stick to the single loan payment and not take on new balances.

What Exactly is a Cosigner on a Loan?

A cosigner is someone who legally agrees to be equally responsible for repaying the loan. This means if the primary borrower stops making payments, the cosigner becomes responsible for paying the loan according to its terms.

The main reason to have a cosigner is to improve your chances of getting approved if your own credit is poor or limited. The cosigner’s good credit essentially helps subsidize approval.

Cosigners also allow borrowers to potentially get lower interest rates by utilizing the cosigner’s stronger credit profile during rate evaluation. Even a modest rate drop makes a difference in long term interest costs.

Having someone cosign your loan, on the other hand, is a big responsibility that should not be taken easily by either party. Examine the benefits and drawbacks with me, please. Let’s look closer at the pros and cons.

Benefits of Having a Cosigner for Debt Consolidation Loans

Improved Approval Chances

Having poor credit in the 500-600 range may lead to frequent consolidation loan denials when applying solo. But a cosigner with very good credit can help you overcome poor scores.

Lower Interest Rates

While lenders evaluate your credit first, the cosigner’s strong history helps bring down rates that may have been sky-high otherwise. Every bit of rate drop counts when reducing interest costs over the long run.

Bigger Loan Amounts

In addition to approving consolidations that may have been denied, some lenders allow larger loan amounts with a cosigner’s good credit backing it. This provides flexibility to consolidate higher balances.

Faster Loan Funding

A smooth approval is faster, and some lenders expedite funding for cosigned loans. This allows you to get out from high-interest debts quicker.

Paying Down Principal

As long as you make regular payments, even with a cosigner the consolidation loan principal gets paid down steadily, providing a clear countdown to becoming debt free.

Potential Downsides and Risks of Cosigning a Loan

Shared Legal Obligation

Know that the cosigner is equally 100% responsible for the loan. Their credit will be damaged if payments are missed, and the lender can pursue collections from them.

Impact on Cosigner’s Credit

The new loan and monthly payments get reported on the cosigner’s credit report. More debt liability can lower their scores.

Strained Relationships

A borrower missing payments can severely damage relationships with friends or family members who cosigned the loan.

Hard to be Removed

Cosigners can’t easily be removed. The borrower usually needs to refinance in their own name once credit is reestablished.

Enables Bad Habits

The “safety net” of a cosigner could enable some borrowers to continue irresponsible spending habits that got them into debt trouble initially.

Who Makes a Good Cosigner For Debt Consolidation?

If going the cosigner route, choose someone very financially stable with excellent credit who fully grasps the gravity of cosigning a loan. Ideal cosigners include:

A family member or close friend with a 700+ credit score
Someone steadily employed with ample income to repay if necessary
A naturally responsible person skilled at managing their own debts
Someone comfortable making a long-term financial commitment
A co-borrower who also benefits from the loan such as a partner or spouse

Communicate openly beforehand so the cosigner understands the repayment plan and that late payments severely hurt both of you. Make absolutely sure they are on board!

Alternatives if You Can’t Get an Ideal Cosigner

If you lack a cosigner option, first try improving your credit score before re-applying for a consolidation loan solo. Or, consider alternatives like:

Credit counseling agency debt management plans
0% balance transfer credit cards
Borrowing against your home equity
Seeking lending assistance from a local credit union
Community programs or personal loans from family/friends
Peer-to-peer lending platforms like Prosper where you request funds from individual investors

While challenging, taking action to reduce debt yourself shows responsibility that improves your credit. Debt consolidation with a cosigner can provide a helpful credit boost when approached carefully.

Can I borrow money with a cosigner?

Yes, adding a cosigner to your loan application can allow you to borrow money that you may not have qualified for on your own. The cosigner’s good credit helps compensate for issues like low scores or insufficient credit history on your application.

Does Prosper allow cosigners?

Yes, the peer-to-peer lending platform Prosper does allow cosigners on their personal loans. Having a cosigner with strong credit can help improve the chances of getting funded by investors on Prosper.

Can a co-signer have debt?

Yes, it is possible for someone to be a co-signer even if they currently have their own debts.

The keys are that the cosigner still has excellent credit despite their own debts. Also, and sufficient income to reasonably manage repayment of both their debts and the cosigned loan if required.

Cosigning new debt can impact their credit score and debt-to-income ratio. The best cosigners have great credit, steady income to repay debts, and excellent money management skills.

Discuss the cosigner’s specific circumstances openly to determine if they are financially suited to cosign a consolidation loan responsibly.

Conclusion

A cosigner can be a lifeline for debt consolidation loans when credit is poor. But cosigning is a major commitment with risks like shared liability.

Approach thoughtfully, choosing only responsible cosigners with excellent credit. With open communication, it can be an effective strategy to gain control of debt.

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