When is a Co-Signer Required for Debt Consolidation?

Debt consolidation involves you taking out a loan or a line of credit to pay off several other debts. You can get debt consolidation loans through credit cards, a home equity line, or a personal loan. For example, you might apply for a personal loan to bundle both your car loan and two outstanding credit card balances.

What are the Advantages of Debt Consolidation?

• Debt consolidation allows you to put all of your debt in one place, simplifying your payments.
  
• In some cases, a consolidation can offer you a lower payment and/or a lower interest rate, but be careful! Sometimes these lower rates are "introductory rates," which means that you may pay more in interest if your balance is not paid in full when that introductory rate expires.

What are the Disadvantages of Debt Consolidation?

Debt consolidation loans do not remove debt. They simply move it from one place to another. Getting on a plan to remove debt all together is better than simply applying for consolidation.

Who is a Co-Signer?

A co-signer is a person with good credit who is willing to back you on your loan application. The co-signer agrees to take on the debt if you are unable to make the payments or meet the loan's obligation. If you're credit is less than perfect, you are most likely to need a co-signer for a debt consolidation loan.

To use the previous example, if you are applying to have your car loan and two other loans consolidated under one large personal loan, your co-signer will also sign forms with the lender, clearly stating that they are financially responsible if you fail to meet the terms of the consolidation loan.

How are Co-signers Affected by Debt Consolidation?

Agreeing to be a co-signer involves some risk, especially if the primary loan holder is already in financial trouble, and thus needing the debt consolidation loan in the first place. A co-signer is putting his or her own credit rating in jeopardy if you default on this consolidation. Banks have the right to pursue your co-signer if you fail to make payments, and if they are unable to make payments on your behalf, their credit is likely to suffer.

Also, your co-signer's credit may be affected simply by signing onto your new debt. One's credit score is comprised not only of how often they make timely debt payments, but also by the amount of overall debt (in relation to income) that they carry. Adding significantly to debt load by being a co-signer can have a negative impact on one's overall credit rating.

Getting Help

If you are consolidating debt and being asked to get a co-signer, or if you are being asked to co-sign for someone's debt consolidation, it is important you speak with a qualified attorney. Your lawyer can explain exactly what you are signing up for with the loan and can help you make sue it is fair. He can also help you explore any other options you may have to deal with debt.