If I Have Bad Credit, Can I Get a Loan With a Co-Signer?
Updated: November 16, 2023 Author: Paul Gillooly
In many cases, even with bad credit, you can get a loan with the help of a co-signer, so long as the peson has a good credit rating. They agree to take responsibility for payments if you can’t make them. Cosigned loans, however, may still have higher interest rates.
What Is a Co-Signer?
A co-signer is also known as a guarantor and is usually someone you have a trusted relationship with, such as a close friend or family member. The co-signer signs the loan contract with you, agreeing to be responsible for the debt if you fail to make payments.
If you have bad credit and struggle to find acceptance from an unsecured lender, a guarantor loan might be a good option for you. With someone to back up the loan, you can usually borrow a larger amount and benefit from lower interest rates. That said, you must still shop around to get the best deal.
Before asking someone to cosign a loan, you must ensure they know about the risks involved. They are equally responsible for the debt, and if you fail to make payments, it can potentially damage your relationship with them.
Using a guarantor to get a loan could help to improve your credit rating, so long as you pay it back fully, on time and don’t miss payments. It could also help build the guarantor’s credit rating too. On the flip side, if you don’t make the payments, it can damage the co-signer’s credit rating and may prevent them from getting future credit.
What Makes a Good Co-Signer?
A co-signer must have a steady income and a good credit rating. A lender will usually refuse the application if they have a low score. To avoid multiple credit searches and denials, which will damage your credit rating, you should choose a guarantor that fits the following criteria:
- Good credit rating – If the person backing up your loan has a good credit rating, you will generally get a better deal on interest rates. If they have a poor rating, lenders also see them as high risk and will refuse the application.
- Steady income – The guarantor must have a steady income so the lender is confident that they can make payments if you fail to do so.
- Low debt-to-income ratio – Ideally, a guarantor will have a low debt-to-income ratio, meaning they don’t already have multiple debts.
Why Do I Need a Co-signer to Get a Loan?
One of the main reasons you may need a co-signer for a loan is if you have a poor credit rating and aren’t likely to be approved by a lender. A lender may also refuse credit if you have a high debt-to-income ratio.
You may also need a guarantor if you are self-employed and don’t meet the minimum income requirements – or if you are a young adult with a small income and little credit history.
Things to Consider Before Getting a Loan With A Co-signer
If you have bad credit and a high debt-to-income ratio and need a co-signer to get a loan, it’s sensible to ask yourself if extra credit is necessary. You must assess your budget to ensure you can afford more credit and be aware that the guarantor is at risk if you don’t make payments.
Let’s take a closer look at the things to consider before getting a loan with a co-signer:
Is the Loan Necessary?
If you have bad credit and lots of debt, seriously ask yourself if getting another loan is a good option. A loan will add more monthly outgoings to your budget and can worsen your credit rating if you don’t keep up the payments. If the loan isn’t for something necessary, is it worth taking the risk and putting yourself under more financial pressure?
Can You Afford It?
Before you apply for a loan with a guarantor, assess your income to establish how much you can realistically pay each month and only borrow what you can afford. If taking a loan squeezes your budget, ask yourself what would happen if you get unexpected bills or become unemployed, for example. It’s sensible to consider every eventuality before you take on more debt.
You should also check the small print on the loan contract and look out for added costs such as insurance and late or early payment fees. Hidden costs can be a nasty surprise and take you over your budget.
The Co-signer Is at Risk if You Don’t Make Repayments
As I previously mentioned, the guarantor is at risk if you don’t make loan repayments. They must make the payments on your behalf – and may even gain a bad credit rating if you don’t pay. A guarantor is usually a close friend or family member, and you may risk your relationship with them if you can’t make payments.
What Are the Alternatives to Getting a Loan With a Co-signer?
If you have bad credit, taking a loan with a co-signer may be tempting, but it also comes with risks. The alternatives to loans include borrowing directly from a friend or family member, saving up or using a credit card. If you are in severe debt, consider getting professional debt advice about how to manage your finances.
Below, we’ll explore the alternatives to getting a loan with a co-signer:
Alternative #1 – Borrow From a Friend or Family Member
The fantastic thing about borrowing from friends or family is that it doesn’t come with hidden fees or high interest and won’t affect your credit rating. Loaning money from a friend is usually a flexible agreement, and you can develop a payment plan that suits both parties. The drawback of loaning from a friend is that your relationship might be at risk if you don’t pay the money back as arranged.
Alternative #2 – Use a Credit Card
Using a credit card instead of getting a loan is a good option because, usually, you will get a better interest rate. Sometimes, you can enjoy 0% interest depending on the terms and conditions. Credit cards also have benefits such as reward schemes and cashback. But, before using a credit card, read the terms and conditions carefully. Look for hidden fees and avoid cards with high interest rates.
Alternative #3 – Save Up
If you don’t need the loan for something urgent, consider saving up instead. Saving money takes time and discipline but is incredibly rewarding and doesn’t come with any risks, contracts or high interest rates.
Alternative #4 – Get Professional Debt Advice
If you struggle to make ends meet each month, have multiple debts, and find it hard to get credit, you should get professional debt advice. Getting more loans will only put you deeper into a hole and isn’t a viable long-term solution.
Alternative #5 – Improve Your Credit Score
Each lender is different, but generally, lenders consider a rating between 0 and 550 very poor and between 550 -720 poor. If you have poor credit, you will pay higher interest rates on loans and ultimately develop more debt in the long run.
Luckily, your credit rating isn’t set in stone, and you can improve it over time and enjoy affordable interest rates. I’ll tell you more about how to boost your credit rating in the section below.
How Can I Improve My Credit Score?
You can improve your credit score by paying bills on time and ensuring the details on your credit report are up to date. You should also stay below your credit limit on credit cards and overdrafts and avoid making multiple credit applications.
Though it won’t happen overnight, there are many ways you can improve your credit rating, and I’ll tell you about them below:
Tip #1 – Pay Bills on Time and in Full
If you don’t pay your bills on time and are in the red with utility or phone companies, this will negatively affect your credit rating. You can use direct debit to pay bills or set notifications on your phone – so you don’t miss payments. If you pay bills on time, it shows lenders that you can manage your monthly finances.
Tip #2 – Register on the Electoral Roll
Registering to vote on the electoral roll is one of the simplest ways to help boost your credit rating. Appearing on the electoral roll is the best way to help lenders confirm your identity and location.
Tip #3 – Don’t Max Out Your Credit
Another fantastic way to improve your credit score is by staying below your credit limit on credit cards and overdrafts. Aim to use only 25-30 per cent of your credit allowance. You should also try and make large monthly payments on credit cards instead of just the minimum amount.
Lenders view you as high risk if you are constantly at maximum credit and have a large debt-to-income ratio.
Tip #4 – Get a Small Loan and Pay It Off in Full and on Time
One of the best ways to boost your credit rating is by demonstrating that you can pay debts off fully and on time. A fantastic way to do this is by taking out a small, affordable loan. Making regular payments and clearing debts will improve your credit score.
Tip #5 – Use Soft Searchers to Check Your Credit Score, and Don’t Make Multiple Applications
Every time you apply for credit, lenders use a hard search to check your credit report thoroughly. Too many hard searchers in a short period will negatively affect your credit score, so you must leave plenty of time between applications.
Soft credit searches don’t dig deep into your credit history or affect your credit rating. Instead, they provide a brief credit history and are mostly used for comparing deals and rates rather than applications.
Tip #6 – Ensure the Information on Your Credit Report Is Accurate
If the information on your credit report, such as your address, isn’t accurate, lenders see this as a red flag and will refuse a credit application. Each refusal harms your credit score, so it’s crucial to ensure your information is up to date. Ideally, you should check the details on your credit report annually.
Tip #8 – Use a Credit Builder Credit Card
Credit builder credit cards are designed for people with poor credit ratings and have a lower spending limit and higher interest rates than standard credit cards. Using a credit builder card will help you improve your credit score if you stay below the credit limit and fulfil monthly payments.
To boost your credit rating with a credit builder card, avoid using the maximum credit allowance – try and keep it at around 25%, and always pay more than the minimum monthly payment.
In answer to the question, if I have bad credit, can I get a loan with a co-signer – in most cases, the answer is yes. For the best chances of loan approval, you must choose a reliable guarantor with a good credit rating and low debt-to-ratio income.
Before applying for a loan with a co-signer, you must make them aware of the risks involved. Their credit rating will suffer if you fail to make payments, and it may also cause problems in your personal relationship if they have to pick up the bill.
If you have a bad credit rating, getting a loan with a co-signer isn’t always the best option. A loan will add more financial pressure to your monthly budget and damage your credit rating further if you don’t make payments.
Instead, try to improve your credit rating before taking out a loan, consider saving up instead of getting credit, or borrow the money from a close friend or family member. If you have severe financial problems, don’t be afraid to seek professional debt advice.