When to Co-Sign a Loan

personal financeOne of the most frustrating aspects of being denied for a loan is that the application itself will decrease the borrower’s credit score, even though no actual debt transaction will actually take place. Because of this catch-22 situation, many individuals become particularly averse to applying in the first place, and are continually frustrated by seeing their applications denied without a seemingly good explanation.

However, regardless of whether it’s an issue of credit score, financial ratio imbalance, or net worth, these borrowers will continually hear the lending institution ask if they are capable of producing a co-signing party. While such a question might come off as being patronizing, it is important to recognize how it is that the strategic addition of a co-signer to a debt application can make all the difference, so long as we understand exactly how it is that they can have an impact on an application.

A co-signer is a third party that is willing to take responsibility for a borrower’s debt in the event that they should be unable to make the payments themselves. While this means that the third party is now liable for the full amount of the loan as if they had taken it out themselves, it also means that the borrowing party will have a much stronger application than they would have just on their own.

While the trick to finding a co-signer comes mainly from simply researching a person that is willing to take such a great risk upon the borrower’s personal credit, it is important to recognize that a co-signer should have a credit position that compliments the borrower’s. Unless we make sure that the combined positions of the borrowers support each other, it is possible that even the combined application will fail.

When addressing the question of whether or not to have a co-signer added to a loan, we first need to understand how it is that a complementary co-signer can add value to our application. This must be done by examining the short-comings of our own application. Not sure what parts of the application need work? Try reviewing the last couple of posts from this site, and see if there’s anything that jumps out.

Maybe it’s that our existing debt obligations are too high, and it’s throwing out our TDSR ratio. In this situation, we would need to find a co-signer that either has a very high income, or a low amount of existing living expenses, so that we can strengthen the application’s overall TDSR.

If it’s more an issue of net worth, TDSR matters less. In reality, an individual with a high TDSR might actually be in our favour if their debt obligations are being paid towards asset-based loans, because it means that these individuals will have equity worth available in their purchases. While they won’t necessarily have cash flows available, they will provide the net worth required for the loan through their tangible asset base. Lastly, a solid co-signer can provide value to an application by simply having a history with debt.

In many situations, new borrowers don’t have enough history to meet their purchasing needs, but will have all the resources and intention in the world available to pay back the debt itself. By adding a co-signer with an established score in their file, the lender is better able to assess the value of the borrower’s actual assets and ability to repay, without fear of fraud because of the young file.

Regardless of how it is that a co-signer is added to an application, a bad application is bad on its own. As such, co-signatures are only practical for situations where a borrower is applying with a remote flaw that is undermining the entire application. Without some redeeming factors to support the main applicant on their own though, the application will still be rejected.