You have probably heard some horror stories about people losing property and a lot of money over loans they did not touch, or others having their credit reputation destroyed over money they had no control over.
This is why many people are nervous about cosigning loans.
When lenders are providing loans, their primary concern is your ability to pay it back. If a background check shows that you are a risky borrower, they might hesitate to offer the loan.
Here are three situations that can cause a bank not to give you a loan:
a) Low credit score
A credit rating shows the borrower’s likelihood of defaulting on payments. The lower the score, the riskier the loan. A low rating will either cause the lender to reject the loan application or charge a high-interest rate.
b) Level of income
Your income should match your loan. It should be capable of adequately covering the loan and leave some over for your survival. You can’t earn 50,000 annually and take a $200,000 loan. That is a recipe for default.
c) Level of debt
You could have a good credit score, but this may still not be adequate proof of your ability to pay. A large portion of your income could be going to debt payment, which indicates that you are not in a position to take another debt. For this reason, the bank will want to calculate your debt-to-income ratio.
If the bank disqualifies your application or offers a high-interest rate due to any of these reasons, a cosigner can turn the situation around.
Who is a Cosigner?
This is an individual with a good credit score and an adequate level of income. They commit to paying the borrower’s debt in case of default.
A cosigner mitigates the risk involved and increases the chances of approval. A loan application with a cosigner is likely to receive a friendlier interest rate, lower costs, and flexible repayment according to nation21loans.
Cosigning a loan is not easy. It is a large and risky commitment for a number of reasons.
a) It will show on their credit report
A cosigned loan shows on the cosigner’s credit report as a new loan, and this can impact their debt to income ratio. A high debt-to-income ratio will make it hard for the individual to easily get personal credit.
b) You are a risky borrower
The fact that the bank is not willing to grant you a loan without a co-signor is a sign that you are a risky borrower. This risk is transferred to the cosigner. If you fail to make payments on time, it can lower their credit rating.
c) It is a legal responsibility for the debt
The cosigner is legally committing to repay the loan if you default. Failure to do so will have the lender suing them, seizing their property, or using collection agencies. No one enjoys paying for a loan that has not benefited them in any way.
With so many risks involved for the cosigner, convincing someone to cosign your loan is not easy. It is not a casual conversation. You need to present your situation and convince the individual to make the commitment.
Here is how you can go about it.
1) Ensure That Your Prospect Is Capable
Not that you intend to default on the loan, but it is good to ensure that your candidate is not financially strained. If things take a wrong turn such as an illness or disability on your part, they should be capable of paying the installments. Be sure that they are stable and qualified to cosign the loan.
2) Explain Why You Need the Loan
No one wants to consign a loan for an individual without a plan. Demonstrate why you need the loan and how it will be of benefit. Show them the way that it could create value or solve a problem in your life. Being someone who wants the best for you, they should be capable of understanding your need.
3) Present Your Payment Plan
You need to build the prospect’s confidence by proving your ability to repay the loan. Show them physical evidence such as salary slips or your business’s income statement that demonstrates your ability to pay.
4) Commit in Writing
Your promises will carry more weight if you put them in writing. Write that you are committed to making the payments on time. Indicate how you intend to compensate for their losses should something happen down the line.
5) Discuss the Details
Your prospect needs to be fully aware of the legal obligation of cosigning a loan. Provide accurate details of the monthly installments and the costs involved. If the bank is ready to set the cosigner free after you have made some timely payments of the installment, make the prospect aware of this. Itwill increase their chances of accepting the request.
6) Go to the Bank Together
Once the cosigner is on board, go to the bank together. Read all the paperwork carefully and if any details are unclear, seek clarification from the loans officer. Visiting a business lawyer together can also help the cosigner understand their legal obligation better and learn about their rights as a cosigner.
In summary
If you don’t qualify for a loan due to a poor credit rating, low income, or a high debt-to-income ratio, getting a cosigner can increase your chances of getting the loan approved at fair terms.
Using a cosigner is a better option than using predatory loans such as payday or title loans. The only challenge is in convincing your prospect to commit to a loan that does not benefit them.
Approach them as you would a bank when borrowing credit. Present your case by demonstrating why the loan is important and how you will pay without putting their credit rating at risk. Be honest about the details of the legal obligation.
By following these tips, you should be able to convince your prospect to sign the paper.