Qualifying for a loan is sometimes easier said than done. Just because you need a mortgage to buy your first home or a personal loan to consolidate and pay off credit card debt, doesn’t mean a lender is going to magically understand and give you the exact loan and interest rate you want.
Thankfully, if you’re struggling to qualify for a loan, you might be able to ask a friend or family member to step in to help. If they agree, essentially, you leverage their income, credit score, and financial history to help you get a loan that’s right for you.
The downside is that this type of borrowing (as in, borrowing money with another person) can get a little jargon-heavy. “Coborrower,” “co-applicant,” and “cosigner” are all terms that are going to come up. Let’s dive into the details.
What is a Coborrower?
A loan co-borrower basically takes on the loan with you. Their name will be on the loan with yours, making them equally responsible for paying back the loan. They will also have part-ownership of whatever this loan buys — for example, a co-borrower will own half of the home if you take out a mortgage together.
Spouses, for example, might coborrow when buying property, or if they are taking out a home improvement loan for a remodel. You and your co-borrower may qualify for a larger loan or better loan terms than if you were to take out a loan solo, and this way you both own the investment and are equally responsible for loan payments.
Another quick piece of jargon: A co-applicant is the person applying for the loan with you. Once the loan is approved, the co-applicant becomes the co-borrower.
Coborrower vs. Cosigner
A cosigner, on the other hand, plays a slightly different role than that of a co-borrower.
A cosigner’s financial history and credit score is factored into the loan decision, and their positive financial history can be a boon to the primary applicant’s loan application. But they do not have ownership of any property the loan might be used to purchase, they do not receive any loan proceeds, and would only help make your loan payments if you were unable to make them.
Cosigning helps to assure lenders that someone will be able to pay back the loan. Typically, a cosigner with a stronger financial history than you have, which can help you get a loan you might not qualify for on your own (or for better terms than you may qualify for on your own). Lenders might be more comfortable lending to you if your cosigner has a strong credit score and a dependable income, but loan underwriting criteria (that is, the personal financial factors used to determine who gets a loan at what rates and terms) differ from lender to lender.
For example, let’s go back to our hypothetical home-buying experience. A parent with a strong credit history might cosign their child’s mortgage, allowing the child to get a lower interest rate on their home loan than they would have on their own. The parent wouldn’t own the home, but they would have to make mortgage payments if their child couldn’t.
Benefits of a Coborrower
Having a co-borrower can help two people who both want to achieve a financial goal — like first-time homeownership or buying a new car — put in a stronger application than they might have on their own. Because the lender will have double the financial history to consider (and two borrowers to rely on when it comes to repayment), the loan is a potentially less risky prospect for them, which could translate to more favorable terms.
Basically, having a co-borrower has the potential to improve the borrowing power for both partners involved — whereas having a cosigner is generally more beneficial to the primary applicant than it is for the cosigner.
When Does Having a Coborrower Make Sense?
Applying with a co-borrower makes the most sense when you’re working as a team toward some financial objective. Spouses buying a house together is a common example, but a joint personal loan with a partner might also be considered in order to fund home improvements or consolidate debt to get your finances in better shape before getting married. Business partners also sometimes coborrow loans to help get their ventures up and running.
Many companies, including SoFi, now allow qualified individuals to coborrow on personal loans. That means you and your coborrower (whether they’re your spouse, friend, or a member of your family) may be able to qualify for an even better interest rate and fund your financial goals that much more easily.
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It’s a big decision to take out a loan, so it may be a good idea to make sure both coborrowers are 100% ready to take on this financial commitment. Both of you will be responsible for making monthly loan payments.
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