Applying for a personal loan can be a little scary. After all, lenders don’t hand out cash willy-nilly, even when they’re being paid interest.
When applying for a personal loan, you will normally need to show that you have a good credit score and a high enough income to ensure that you’ll be able to handle your monthly payments (among other requirements). It’s good to note that loan qualifying criteria around minimum credit score required and sufficient income may vary between lenders and even loan programs. It is recommended that you do your research to discover which loan program offers the best fit for you.
Luckily, if your credit score isn’t quite perfect or you’re still waiting on that raise, you may be able to leverage a co-borrower to help get the personal loan you want with the repayment terms you need.
Even if you haven’t heard of a loan co-borrower before, you may have already used one. If you, for example, had your Aunt Mavis sign on as a co-borrower with you for a private student loan or as a guarantor for your first post-college apartment, you have seen the power of the co-borrower to help get your loan or lease approved.
Co-borrowers can help you secure a personal loan when your credit or income doesn’t quite match a lender’s requirements. Having a co-borrower might even help you get a more favorable interest rate on your personal loan. Here’s what to know about using a co-borrower to help secure a personal loan.
What Is a Personal Loan, Anyway?
Before we dive into tips on using a co-borrower, let’s take a step back: What is a personal loan and why might you want one?
A personal loan is an installment loan that is typically an unsecured loan. With an unsecured personal loan, you borrow from a lender with the agreement to pay it back, plus interest, in a set amount of time.
Unlike mortgages and auto loans, personal loans aren’t necessarily tied to a physical asset you put down as collateral, which is what “unsecured” means. However, personal loans can be offered as secured loans, so check the details when rate shopping.
Unsecured personal loans tend to carry slightly higher interest rates than secured loans. After all, the lender doesn’t have a secured asset to seize if you default!
Even though unsecured personal loans typically carry higher interest rates than other, secured loans or credit cards, they can be a useful financial tool to help you consolidate existing debts, fund major personal projects, and more.
And when you apply with a co-applicant (who, if you’re approved, would become your co-borrower), you may significantly increase your chances of qualifying, as well as achieving a lower interest rate or more generous loan repayment period.
What Is a Co-Applicant?
A co-applicant is an additional person who applies for a loan with you in order to help you qualify. Similar terms are “co-borrower” or “co-signer” (we’ll get into the differences below) and by having one, you may be able to secure better interest rates and repayment terms.
Whether a co-borrower or co-signer, the additional person’s credit score and financial history is considered along with yours when applying for a loan. That can be a big help if your own credit history is less than perfect, or if you’re young and haven’t had very much time to build up a robust credit score quite yet.
Differences Between a Co-signer and a Co-borrower?
Both co-signers and co-borrowers are considered co-applicants at first, but they serve different purposes. Whether you need a co-signer or co-borrower usually depends on your individual circumstances. Each type of co-applicant has specific requirements and potential benefits.
A co-borrower essentially takes on the loan with you. Their name will be on the loan with yours, making them equally responsible for paying back the loan. Co-borrowers are frequently used in situations where the loan received has benefits for both of you, whether through a business arrangement or a family arrangement.
An example: You and your partner want to take out a personal loan in order to renovate the garage into a nursery for a baby on the way. You may want to apply as co-borrowers for a loan to pay for the contractor. Because both partners’ incomes and credit scores are considered in approving the loan, this may increase your chances of approval and possibly even lower the interest rates you’re offered.
A co-signer, on the other hand, is someone who helps you qualify for a loan, but isn’t your partner on the loan, as in the case of a co-borrower. A co-signer typically is only responsible for making the loan payments if you are unable to make them, but has no usage or ownership rights. However, credit for both co-borrowers and co-signers will be negatively impacted if the main borrower misses payments.
For example, private student loans are often taken out with parents or other family members as co-signers, since most recent high school graduates haven’t built up a significant credit history.
Adding in mom’s or dad’s credit history may help these students qualify for the student loans they need to get started on their college journey, but it does mean putting their parents’ credit reputation on the line if they default.
Considerations when Applying for a Personal Loan With a Co-applicant
The biggest challenge you might face in securing a co-applicant for a personal loan is finding someone willing to sign on the dotted line. After all, if you find yourself unable to repay the lender, your co-borrower will be on the hook for payment.
That’s why many people who are looking for a co-applicant start with parents, siblings, and other family members who they feel comfortable asking. Blood runs thicker than water, after all, and your close family have likely been supporting you in one way or another since birth.
It is recommended that you have a heartfelt, upfront conversation about the responsibilities that come with being a co-borrower and be ready to present your potential ally with your plan for repayment. For instance, a co-borrower is likely to see a negative impact on their credit score if they fail to make a payment. Since a co-applicant becomes a co-borrower once a loan is funded, you’re in this together, so if paying back the loan does not go according to plan, you both would be equally affected.
If you’re looking for a co-applicant, you might already know exactly who you’ll ask. If it is a loan to benefit your family, such as making home improvements, it likely makes sense for your partner or spouse to serve in the position.
As with a co-signer, make sure to talk openly and clearly about the responsibilities that come with being a co-borrower, including the responsibility for making payments.
After you’ve found your co-applicant, make sure to research which personal loans accept co-applicants. Some lenders accept co-borrowers but not co-signers, and some lenders accept both. SoFi does not accept co-signers for personal loans, but will accept co-borrowers.
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When Does It Make Sense to Take Out a Personal Loan?
Given the risks that both you and your co-applicant assume in taking out a personal loan, you may wonder if this move is ever financially savvy.
After all, the conventional wisdom is to avoid debt at all costs, and unsecured personal loans tend to carry higher interest rates than loans for which you put down collateral, like a mortgage.
However, personal loans can be a sound financial tactic, for example, for the purpose of debt consolidation. That’s when you pay off multiple existing debts with one larger loan, which can simplify bill repayment and save on interest.
For instance, if you’re making payments on two or three credit cards with different interest rates and different due dates, it might be difficult to keep track of everything—let alone get ahead.
However, taking out one personal loan large enough to pay those debts off, generally means only one monthly payment and one interest rate, which could possibly save you money in the long run as well as making your life a little easier. Personal loans can also help you fund home improvements or even cover unexpected medical bills.
If you qualify to borrow money through a personal loan with SoFi, there are no prepayment penalties or origination fees. And as a SoFi member, you’ll have access to member benefits like career counseling and community events.
Plus, we make it easy to find out if you (and your co-applicant) prequalify online. You’ll fill out a bit of personal information and SoFi will run a soft credit check (which doesn’t impact your credit score1). It takes just minutes to see what you may qualify to borrow and what your interest rate could be.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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