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If you want to borrow a large amount of cash but need to prove additional household income, your spouse may be able to help. You cannot simply list a spouse’s income with, or instead of, your own if you apply in your name alone. However, you can list their income if your spouse agrees to become a “co-borrower” on the loan.

Here’s a closer look at when and how you can use your spouse’s income on a loan application.

What Is a Personal Loan?

A personal loan is a type of installment loan that is paid back with interest in equal monthly payments over a set term, which can range from one to seven years. Personal loan interest rates tend to be lower than for credit cards, making them a popular option for consumers who need to borrow a large amount. Common uses for personal loans include major home or car repairs, medical bills, and debt consolidation.

There are different types of personal loans. Unsecured personal loans are the most common. These are not backed by collateral, such as your car or home.

Recommended: What Is a Personal Loan?

Checking Your Credit

Before you decide whether to include your spouse’s income, gather this information to assess your own financial standing.

Credit Report

Lenders will look at your full credit history to evaluate your creditworthiness, so it’s smart to review your credit reports before applying for a loan. You can request a free credit report once per week from each of the three major credit bureaus — Equifax®, Experian®, and TransUnion® — through AnnualCreditReport.com.

When you receive your reports, review them closely and make a note of any incorrect information. If you see any mistakes or outdated information (more than seven years old), you can file a dispute with the credit bureau(s) reporting the error.

If you have a limited or no credit history, consider taking some time to build your credit before applying for a loan.

Credit Score

Next, take a look at your credit score. You can often get your credit score for free through your bank or credit card company. The minimum credit score requirement for a personal loan varies from lender to lender. Broadly speaking, many lenders consider a score of 670 or above to indicate solid creditworthiness.

While there are personal loan products on the market designed for applicants with bad credit, they typically come with higher interest rates.

Debt-to-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is the amount of debt you have in relation to your income, expressed as a percentage. Although some personal loan lenders may be willing to work with borrowers with DTIs as high as 50%, your chances of being approved for a personal loan and getting a good rate are higher if your DTI is below 30%. If your DTI is too high, you have two options: pay down your debt, or increase your income.

Shop Around Online

Shop around and “prequalify” with different lenders to compare the interest rates and monthly payments you’re offered with your income alone. When you’re comparing lenders, keep an eye out for any hidden fees, such as origination fees, prepayment penalties, and late fees. A personal loan calculator shows exactly how much interest you can save by paying off your existing loan or credit card with a new personal loan.

Now that you have a firm grasp of your financial standing, you can assess whether you need to include your partner’s income as part of your application.

Using Your Spouse’s Income

You may be wondering, “Can I use household income for a personal loan?” First, the bad news. You cannot simply use your spouse’s income or your combined household income, even with their permission, when applying for a personal loan in your own name.

Now for the good news. If your partner has a strong credit history and income, they can become a secondary “co-borrower” on the loan. A co-borrower can help improve your chances of approval, along with the interest rates and terms you’re offered.

What Is a Co-Borrower?

A co-borrower applies for the loan alongside you. Both of your financial information is taken into consideration, and both of you are responsible for paying back the loan and its interest.

Let’s look at the pros and cons of this arrangement.

Pros of Using a Co-Borrower

Because co-borrowers have equal rights, the arrangement is well-suited for people who already have joint finances or own assets together. Using a co-borrower allows you to present a higher total income than you can alone. A higher income signals to lenders that it’s more likely you’ll be able to make the monthly loan payments.

Plus, if you manage your loan well, both your credit histories will get a boost over time.

Cons of Using a Co-Borrower

Each borrower is equally responsible for repayment over the entire life of the loan. If the primary borrower cannot make the payments, that could negatively impact the credit of both parties. It’s important to have confidence in a co-borrower’s ability to repay the loan.

The loan will appear on both of your credit reports as a debt, which can affect the ability of one or both of you to get approved for another loan down the line.

Co-borrowers also have equal ownership rights to the loan funds or what the loan funds purchased, so trust is a big factor in choosing a co-borrower.

Applying for a Personal Loan with a Co-Borrower

The basic process of applying for a personal loan is the same no matter the number of applicants. The lender will likely ask both of you to provide certain information up front:

•   Personal info: Photo IDs, Social Security numbers, dates of birth

•   Proof of employment, and your employment histories

•   Proof of income

The lender will then run a hard inquiry of your credit reports, which might temporarily ding your credit score by a few points. Depending on the complexity of your application, you can expect to get your personal loan approved in one to ten days.

Recommended: What’s the Difference Between a Hard and Soft Credit Check?

Alternatives If You Don’t Qualify

If your loan application is rejected, take heart: You still have options. Let’s take a closer look at three avenues you may want to explore.

Consider a Joint Credit Card or Line of Credit

With a joint credit card or joint line of credit, you and your fellow account-holder equally share the spending and repayment responsibility. And because the account is in both of your names, it impacts both of your credit scores. Regular, on-time payments and low credit utilization can help build up your scores, while late payments and accumulated debt may bring it down.

Improve Your Credit and Reapply

This strategy will take some time and patience, but building your credit can help you and your spouse secure better loan terms down the road. There are several steps you can take, including paying your bills on time, paying down debt, and reviewing your credit reports regularly and disputing inaccuracies.

“One way to build credit is to display a history of responsible borrowing,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “For that reason, you may want to place monthly bills and other expenses on your credit card. Just be sure to pay the bill in full each month by the due date.”

Explore Secured Personal Loans

With a secured personal loan, you put up collateral that the lender can take possession of if you fail to repay the loan. While that prospect can be a drawback, this type of loan does have its share of benefits. For starters, it can be a good way to build credit, provided you make regular, on-time payments. And secured personal loans also tend to have a lower interest rate than unsecured loans. (Note: SoFi does not offer secured personal loans. However, we do offer home equity loans, which are secured by your home, and offer lower interest rates than unsecured personal loans.)

The Takeaway

You cannot simply list your partner’s income along with, or instead of, your own when applying for a personal loan in your own name. However, if your spouse agrees to become a co-borrower on the loan, both your incomes and credit histories will be considered. This can increase your chances of getting approved, qualify you for a larger loan, and/or give you access to better loan rates and terms. The catch is that both parties have equal responsibility for paying back the loan, and any late or missed payments can negatively affect both your credit scores.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can I use my husband’s income for a personal loan?

You can use your spouse’s income for a personal loan only if they agree to become a co-borrower on the loan application. That gives you equal ownership of the funds, but also equal responsibility for paying back the loan. How you manage your loan payments can affect both your credit scores — for better or worse.

Can you use someone else’s income for a loan?

You can use someone else’s income for a loan only if they agree to become a co-borrower on the loan. That gives them equal ownership of the funds, and also equal responsibility for paying back the loan. This is a common arrangement between spouses, and between a parent and child.

Can a stay-at-home parent get a personal loan?

Loans for stay-at-home moms or dads are possible if the borrower has a strong credit history and can provide proof of income to show they can make the payments. Without that, they may need to find a co-borrower. A co-borrower’s credit and income can be used to help the primary borrower qualify for a loan, or access better interest rates and loan terms. However, a co-borrower will have equal ownership of the funds, and equal responsibility for repaying the loan. Using a spouse or parent as a co-borrower is a common arrangement when a stay-at-home parent cannot qualify on their own.

How does applying with a co-borrower affect your loan terms?

If you apply with a co-borrower, you may be able to secure better loan terms because the lender considers both applicants’ financial profiles. But remember, you and your co-borrower are also on the hook for paying back the loan.

What are the risks of being a co-borrower on a personal loan?

When you’re a co-borrower on a personal loan, you’re essentially assuming the same financial obligation and risk as if you had taken out the loan yourself. This means if the primary borrower defaults on the loan, the debt is as much your responsibility as it is theirs. And any late or missing payments will negatively impact your credit.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-056

Borrowing money online has become one of the fastest and most convenient ways to access funds when you need them — but it’s not something to jump into without understanding how it works. From choosing a reputable lender to comparing interest rates, fees, and repayment terms, there are several important factors that can impact both your wallet and your peace of mind.

Keep reading to learn how to borrow money safely, how to avoid common pitfalls, and what to look for so you can make a confident, informed financial decision.

Why Have Online Lenders Grown in Popularity?

Online lenders have surged in popularity because they offer a faster, more convenient borrowing experience than many traditional banks. Instead of visiting a branch or dealing with long processing times, borrowers can apply, upload documents, and receive decisions entirely online — often within minutes. Here’s what online lenders may offer:

Familiarity, for Some Customers

A growing proportion of consumers is accustomed to using computers for many aspects of daily life, and making online financial transactions is no different. More people may be looking for things like:

•   Online applications

•   Streamlined underwriting processes

•   Automated funds transfers

A Different Kind of Personal Service

Personalization in the past meant having a face-to-face relationship with a banker. Personalization in today’s world can mean information that is relevant to an individual’s financial needs. This might look like:

•   Personalized financial trends in a portfolio so they can make informed decisions about their financial goals

•   Insights about their spending and saving so they can budget monthly income and expenses to meet their needs

Time Saving

Customers may also want an experience that saves time. Automating tasks is a timesaver that can easily be done with online financial tools. In the case of online lending, the option to set up automatic bill payments and automate other tasks are likely to be considerations when a customer is choosing an online financial company.

💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

Where to Borrow Money Online

When looking for an online lender, you should consider the reputation of the lender, safety precautions the lender has in place, and types of loan products offered. In addition, each person should determine their individual comfort level of doing business with or without personal interaction. Here’s where you can borrow money online:

Banks

Borrowing money online from a bank typically involves a streamlined digital application that allows you to complete the entire process from your computer or phone. Most banks offer online personal loans, where you provide basic information such as your income, employment details, and desired loan amount. The bank then performs a credit check and may request additional documentation, like pay stubs or bank statements, which you can upload directly through a secure portal.

If approved, you’ll receive the loan terms electronically and can sign the agreement using e-signature. Funds are usually deposited directly into your bank account within a few business days.

Recommended: How to Apply for a Personal Loan

Credit Unions

Credit unions generally have physical locations, but may also have online services. Financial services offered by credit unions are similar to banks and other financial institutions, but there are usually specific requirements to be a member of a credit union, such as employment-related or residence in a particular region. Credit unions may offer member benefits such as low fees, high savings rates, and low loan rates.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending is a type of online borrowing where individuals can obtain loans directly from other individual investors rather than from a traditional bank or credit union. Through a digital platform, borrowers submit an application, and investors choose to fund all or part of the loan in exchange for earning interest on the repayments.

Online Lenders

You can borrow money from online lenders by completing a fully digital application that typically takes just a few minutes. These lenders allow you to upload documents, verify your identity, and receive approval without visiting a branch. Many use automated underwriting systems that review your credit, income, and banking activity quickly, which can speed up the approval process.

Once approved, funds are usually deposited directly into your bank account, sometimes as fast as the same day or the next business day.

Options to Think Twice About

Along with favorable options for lending that are available, there are some that may not bring about the best financial outcomes.

Credit Cards

At its core, a credit card is a short-term loan — specifically, a line of credit. If the account balance is paid in full before each month’s due date, it’s a no-interest loan. Financial drawbacks arise, however, when that balance is not paid in full each month, carrying over a balance due.

Credit card interest rates tend to be high, and they accrue on any unpaid balance, compounding what is owed in the next billing cycle. The average credit card annual percentage rate (APR) is currently 24.04% for new credit card offers. It’s easy to see how this can lead to a cycle of debt. Paying off a loan over time is probably more efficiently done with other financial tools.

Recommended: Personal Loan Calculator

Predatory Lenders

It’s important to be aware of predatory lending, which is the practice of offering loans with unfair, deceptive, or abusive terms that exploit borrowers and make repayment difficult or impossible. Both payday loans and title loans are a type of predatory lending. Repeat borrowing is common with these types of loans.

•   Payday loans are short-term loans, typically to be paid off in the borrower’s next payday. Interest rates are extremely high, often 400% or more.

•   Title loans, or pawn loans, use a borrower’s vehicle or other item of value as collateral. The APR on a title loan can be as much as 300%, and lenders often charge additional fees.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

Borrowing money online has never been more accessible, but it’s important to approach the process with clarity and caution. By understanding the different types of ways to borrow money online, comparing interest rates and terms, and checking for reputable, transparent practices, borrowers can confidently choose the option that best aligns with their financial situation.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can I borrow money online instantly?

Yes, you can borrow money online instantly through various lenders offering quick loans. These include payday loans, personal loans, and credit card cash advances. However, be cautious of high interest rates and fees, and ensure the lender is reputable and licensed. Always read the terms and conditions carefully.

How can you protect yourself when borrowing money online?

To protect yourself when borrowing money online, verify the lender’s legitimacy, check for a secure website (https), read the terms and conditions, and understand fees and interest rates. Use reputable credit reporting agencies to check the lender’s history and consider consulting a financial advisor.

Why have online lenders become more popular?

Online lenders have become more popular due to their convenience, quick approval processes, and accessibility. They often offer a wider range of loan products and can be more flexible with credit requirements. Additionally, the ability to compare multiple lenders easily and apply from anywhere has attracted many borrowers.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-066

Maybe you’ve already tried to apply for a regular personal loan — only to be turned down. If so, a guarantor loan might be an option worth looking into. With this type of loan, the guarantor (often a close friend or family member) agrees to repay the loan if the borrower can’t. Since this reduces risk to the lender, guarantor loans can make it possible for those with poor or limited credit to qualify for an unsecured personal loan.

However, guarantor loans come with risks and costs — for both the borrower and the guarantor. Here are some things to consider before you apply for a guarantor loan.

What Is a Loan With a Guarantor

A guarantor loan is typically an unsecured personal loan that requires the primary borrower to have a financial backer, or guarantor. A guarantor may be required because the borrower has not yet established credit or has had credit issues in the past (such as a history of late or missed debt payments). It’s still considered the borrower’s loan, but the guarantor is legally obligated to cover payments and any other fees if the borrower defaults on the agreement.

This guarantee reduces the lender’s risk and enables them to advance the money at a reasonable annual percentage rate (APR). However, APRs for guarantor loans are generally higher than APRs for regular personal loans.

How Do Guarantor Loans Work?

Guarantor loans work in the same way as other types of personal loans — you borrow a lump sum of money from a lender, which you are able to use for virtually any purpose. You then pay it back (plus interest) in monthly installments over a set period of time, which may be anywhere from one and seven years.

The only difference is that a third party (your guarantor) is part of the loan agreement. The guarantor is legally bound to make payments on the loan in the event that you default. A loan default is generally defined as missing payments for several months in a row but the exact meaning will depend on the lender.

While the guarantor bears responsibility for repaying the debt, this individual doesn’t have any legal right to the loaned money or anything purchased with the loan proceeds.

Are You Guaranteed to Get a Loan With a Guarantor?

Although it can certainly help your case, there’s no guarantee that you’ll qualify to take out a loan with a guarantor. Approval depends on the financial profiles of you and your guarantor and the eligibility requirements of the lender.

Who Can Be a Guarantor for Loans?

A guarantor doesn’t need to be anyone specific — it could be a parent, sibling, friend, or even a colleague. You generally want to choose someone you trust and feel comfortable openly discussing your finances with. That’s most likely going to be a family member or a close friend.

Guarantors also need to have a good credit history and typically be at least age 18 (though some lenders require a higher minimum age). Some lenders also require the guarantor to be a homeowner. As part of the application process, guarantors will need to undergo a credit check and provide proof of identification and income, as well as bank details and statements.

What Should I Look for in a Guarantor Loan?

Like any other loan, it’s generally a good idea to look for a guarantor loan with a competitive personal loan interest rates and low or no fees. You’ll also want to carefully consider the monthly payments and be sure you can comfortably afford to make them. While this is crucial with any loan, it’s particularly important with a guarantor loan, since your guarantor will be on the hook for repayment if you fall behind. This could impact your credit as well as put a significant strain on your relationship with your guarantor.

How Much Can I Borrow for a Guarantor Loan?

Many lenders offer personal loan amounts ranging anywhere from $500 to $50,000 (and sometimes up to $100,000 for borrowers with excellent credit). Loan amounts for guarantor loans will depend on which lender you choose as well as your financial situation and your guarantor’s credentials (such as their credit score and income).

Guarantor Loan Requirements

Guarantor loans have eligibility requirements such as minimum credit scores and income thresholds that the guarantor will have to meet. Here’s a closer look.

Credit Score

While the borrower’s credit score might be poor or fair, the guarantor’s credit score should be considerably higher in order to secure the loan.

Proof of Residency

A guarantor will need to provide proof of residency. This can be done by showing documents such as a utility bill, a mortgage or rental agreement, or bank statements.

Income

The guarantor will need to verify a consistent income that’s sufficient to make payments on the loan if the primary borrower cannot. They will need to be able to show proof of income through bank account statements, pay stubs, invoices, and/or tax returns.

Age Requirements

The guarantor must be at least 18 years old, though some lenders have an age requirement of 21 or 22. They will need to show proof of age (and identity) with a government-issued photo ID.

Recommended: How to Apply for a Personal Loan

Types of Guarantors

Guarantors aren’t just for personal loans, and they don’t always take on the full financial responsibility of the agreement they’re entering into. Here’s a look at some different types of guarantors.

Guarantors as Certifiers

A guarantor may act as a certifier for someone looking to land a job or get a passport. These guarantors pledge that they know the applicant and they are who they say they are.

Limited vs Unlimited

Acting as a guarantor doesn’t always mean you’re responsible for the entire loan if the primary borrower fails to repay it. Limited guarantors are liable for only part of the loan or part of the loan’s timeline. Unlimited guarantors, however, are responsible for the full amount and full term of the loan.

Lease Guarantor

A guarantor may be required to cosign an apartment lease if the renter has limited credit and income history. In the event that the tenant is unable to pay the rent or prematurely breaks the lease agreement, the guarantor is responsible for paying any money owed to the landlord.

Guarantors vs Cosigners

Guarantors and cosigners play similar roles in a lending agreement — they pledge their financial responsibility for the debt to strengthen the primary borrower’s application. And, in both cases, these individuals may become responsible for repaying the debt.

However, there are some key differences between a guarantor and a cosigner. The main one is that a cosigner is responsible for repayment of the debt as soon as the agreement is final and will need to cover any missed payments. A guarantor, on the other hand, is only responsible for repayment of the debt if the primary borrower defaults on the loan.

There are also differences in terms of credit impacts. A cosigner will have the loan added to their credit report and any positive or negative payment information that the lender shares with the consumer credit bureaus can have a positive or negative impact on their credit. Becoming a guarantor, on the other hand, will typically not have an impact on an individual’s credit unless the primary borrower defaults on the loan. At that point, the loan will appear as part of the guarantor’s credit report.

Pros and Cons of Guarantor Loans

A guarantor loan can allow you to borrow money even if you have limited or less-than-ideal credit. It can also help you avoid expensive and risky subprime loans that are marketed to borrowers with bad credit. In addition, the proceeds of a guarantor loan can be used for virtually any purpose, including emergency expenses (such as a car repair or medical bill) and lifestyle expenses (like a wedding or home improvement project).

As with all forms of credit, getting a guarantor loan can help you establish or build your credit, provided you manage the debt responsibly and keep up with your payments. Stronger credit can give you access to loans with better rates and terms in the future, without the need for a guarantor.

But these loans also come with some downsides. For one, guarantor loans can be expensive, often with higher APRs than other types of personal loans. Also, you’ll want to make sure you can keep up with the payments. Should you default, you’ll not only be hurting yourself but also the person who signed on as your guarantor.

Another downside is that there are fewer guarantor loans on the market than traditional personal loans. This can lead to less choice of lenders, making it harder to shop around and find a good deal.

What Happens if a Guarantor Cannot Pay?

A guarantor is legally obligated to repay the loan if the primary borrower defaults. If the borrower defaults and the loan is a secured loan, then the guarantor’s home could be at risk if the borrower defaults on the repayments and the guarantor is also unable to pay. This is not the case for unsecured guarantor loans, but the lender will still pursue the guarantor for the repayment of the debt, possibly through the courts.

Alternative Options to a Guarantor Loan

What if you don’t have a trusted person to ask to be your guarantor or you don’t want to ask anyone to take on this responsibility? Here are some alternatives to a guarantor loan that you could consider.

•   Secured credit card: If you have some cash, you could pledge that as collateral on a secured credit card. Responsible use of this type of credit card could help you build your credit history so you can improve your chances of future loan approval. Interest rates on secured credit cards can be higher than regular credit cards, and there may be fees associated with their use.

•   Flex loan: A line of credit that is similar to a credit card, a flex loan can also be used to build credit. Borrowers can use funds up to their credit limit, repay those funds, and borrow them again. Interest rates on flex loans tend to be high, and there may be fees assessed daily or monthly or each time the loan is used.

•   Loan from a friend or family member: Perhaps the person you ask to be a guarantor doesn’t want to take on that responsibility, but they are willing to directly loan you the money. A loan from family or a friend can be an option to consider, but you’ll want to be sure to have a written agreement outlining the expectations and responsibilities of both parties. This will go a long way to minimizing miscommunication and hurt feelings. Keep in mind that this is not an option that will help you build your credit history.

The Takeaway

Getting approved for an unsecured personal loan is more likely if you have a solid credit history, an above-average credit score, and sufficient income to satisfy a lender’s qualification requirements. If you’re lacking one or more of these things, you might consider other types of loans, which might include a guarantor loan. SoFi does not currently offer guarantor loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What are guarantor loans?

A guarantor loan is typically a type of personal loan that requires the primary borrower to have a financial backer, or guarantor. The guarantor agrees to pay the debt if the primary borrower defaults on the loan agreement.

How do I get a guarantor for a loan?

You might consider asking a trusted friend or family member to be a guarantor. This person should be someone who has solid credit and sufficient income to cover the loan payments should you default on the loan.

Are you guaranteed to get a loan with a guarantor?

No. Having a guarantor may strengthen a loan application, but it’s up to each individual lender to assess the qualifications of both parties.

Photo credit: iStock/fizkes

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-035

Adding either a guarantor or cosigner to a loan can increase your odds of approval. But while these supportive roles are similar, they are not exactly the same.

Both a guarantor and a cosigner agree to cover a borrower’s debt if the borrower fails to repay what they owe. The key difference is that a cosigner is responsible for the loan right away, whereas a guarantor isn’t responsible for repayment unless the borrower fully defaults on the loan.

Whether you’re looking for a cosigner or guarantor, or thinking of acting as one or the other, there are some key differences both parties need to understand. Here’s a closer look at guarantors versus cosigners.

Is a Guarantor the Same Thing as a Cosigner?

The short answer: No.

Guarantors and cosigners fulfill similar roles: They help make it possible for a primary applicant with poor or limited credit to be approved for a loan by agreeing to take responsibility for the loan should the primary borrower become unable to pay. (These terms can also come into play when someone without a strong credit or income history is looking to rent an apartment.)

But there are some key differences between a guarantor and a cosigner. The biggest is how soon each individual becomes responsible for the borrower’s debt. A cosigner is responsible for every payment that a borrower misses. A guarantor, on the other hand, only assumes responsibility if the borrower falls into default on the loan.

Acting as cosigner versus a guarantor also impacts your credit in different ways. In addition, which role you take on affects how much access you have to information about the loan.

What Is a Guarantor?

A loan guarantor is someone who promises to pay a borrower’s debt if the borrower defaults on their loan obligation. This reduces the lender’s risk and, as a result, they might offer guarantor loans to applicants who wouldn’t qualify on their own.

Unlike a cosigner, a guarantor isn’t responsible for every payment that a borrower misses. They only need to step up when the primary borrower has defaulted on the loan. A default means a borrower has failed to repay the funds according to the initial agreement. With most consumer loans, this typically involves missing multiple payments for several weeks or months in a row.

Simply becoming a guarantor will generally not impact your credit reports and credit scores. But if the loan falls into default, leaving you responsible for all outstanding payments, it will be added to your credit report. If you fail to repay the money owed, your credit rating could be negatively impacted.

Being a guarantor for a rental property is similar to being a guarantor on a loan — it involves you vouching for the tenant. If the tenant is unable to meet their obligations under the tenancy agreement, you (the guarantor) will be legally bound to cover the overdue rent or any damage to the property.

As a guarantor, you have the responsibility of repaying the debt, but you don’t have any legal right to the loaned money, anything purchased with the loan proceeds, or to live in the dwelling if you’re acting as a guarantor on a lease.

What Is a Cosigner?

A cosigner is someone who applies for a loan with someone who may not qualify on their own and takes equal responsibility for the account. For example, many parents act as cosigners on their children’s student loans, since young people tend not to have long and robust credit histories.

Unlike a guarantor, a cosigner’s liability begins right away. Cosigners are responsible for any payments that the borrower misses. If the borrower defaults, the cosigner is also responsible for the full amount of the loan.

The debt account and payment history will appear on both the primary borrower’s credit report, as well as the cosigner’s credit report. And, depending on how the primary borrower manages the account, the loan could help or hurt both the primary borrower’s and the cosigner’s credit scores.

If the primary borrower defaults on the loan, lenders and collections agencies can try to collect the debt directly from the cosigner.

Although the cosigner is legally obligated to make payments if the borrower can’t, they have no rights to the loan proceeds.

A cosigner is not the same thing as a co-borrower in that they don’t have any claim on the loaned asset. Also, unlike a co-borrower, a cosigner’s intention is to boost the creditworthiness of the borrower, not to jointly repay the debt.

Recommended: Getting a $15,000 Personal Loan With Good or Bad Credit

Guarantor vs Cosigner: The Similarities

Both guarantors and cosigners pledge their financial responsibility for the debt to strengthen the primary borrower’s application. And, in both cases, they may become responsible for repaying the debt.

Another thing guarantors and cosigners have in common is that they do not have any right to the loaned money, or assets purchased with the money (one exception: the cosigner on a lease may be entitled to live on-site).

Guarantor vs Cosigner: The Differences

The main difference between a guarantor and a cosigner is the level of legal liability for the debt.

A cosigner is responsible for repayment of the debt as soon as the agreement is final and can request to have loan statements sent to them, so they’ll know right away if any payments have been missed. A guarantor, by contrast, is only responsible for repayment of the debt if the primary borrower defaults on the loan and will only be notified at that point.

There are also differences in terms of credit impacts. A cosigner will have the loan added to their credit report and any positive or negative payment information that the lender shares with the consumer credit bureaus can have a positive or negative impact on their credit. Becoming a guarantor, on the other hand, will not have an impact on your credit unless the primary borrower defaults on the loan.

Recommended: Guide to Unsecured Personal Loans

Personal Guarantor vs Cosigner: Pros and Cons

If you are the primary borrower and deciding between a guarantor and cosigner, the choice may come down to which kinds of loans are available (guarantor loans can be harder to find than loans allowing a cosigner) and what kind of agreement you’re entering into. If you’re signing a lease with a roommate, that person should be a cosigner rather than a guarantor.

If you’re thinking of acting as a guarantor versus a cosigner, here’s a look at the benefits and drawbacks of each.

Pros and Cons of Being a Guarantor

Pros:

•   Helps a borrower obtain a loan more easily

•   Can help a borrower get approved for a larger loan amount or more favorable rates and terms than they would be able to get on their own

•   Helps a borrower build credit and learn how to manage credit responsibly

Cons:

•   Your credit score could be impacted if the borrower defaults on the loan

•   You’ll be liable for the full debt if the borrower defaults on the loan

•   Should the borrower default, your ability to obtain another loan for a different use may be limited

Pros and Cons of Being a Cosigner

Pros:

•   Helps a borrower obtain a loan more easily

•   Can help a borrower get approved for a larger loan amount or more favorable rates and terms than they would be able to get on their own.

•   Helps a borrower build credit and learn how to manage credit responsibly

Cons:

•   Your credit could take a hit if the borrower pays late or misses payments and the lender reports the delinquency to the credit bureaus

•   You will need to make any payments the primarily borrower misses

•   If need to apply for credit for yourself, the lender may deny you because your current debt levels are too high

Recommended: How Do I Get the Best Interest Rate on a Loan?

Do Guarantors Get Credit Checked?

Yes — as part of the application process, the lender will carry out a credit check on you. However, this is normally a “soft” credit check which will not be visible to other companies and won’t impact your credit score. Generally, a guarantor will need a robust credit and income history to make up for the applicant’s shortcomings.

When Is a Cosigner or a Guarantor a Good Option?

Recruiting a cosigner or guarantor can be a good option if you have low credit scores or a limited credit history and are looking to get a personal loan, student loan, mortgage, auto loan, or other type of credit. This can not only help you qualify for the loan but also give you access to better rates and terms than you could get on your own.

Taking out a loan with a guarantor or cosigner — and making regular on-time payments on that loan — can help you build your credit. This can help you qualify for more types of loans and better rates in the future without a cosigner or guarantor.

Just keep in mind that if you ask a trusted friend or family member to act as a cosigner or guarantor and you fail to make timely payments, you could put a significant strain on your relationship. You will also be putting that person in a difficult financial position.

Questions to Ask a Guarantor or Cosigner

One of the weightiest parts of deciding to use a cosigner or guarantor is having to ask someone to do you this favor, which is a big one. It’s important that there’s mutual trust in the relationship between the borrower and cosigner or guarantor, since their actions can have an impact on each other’s finances.

Some questions to ask your cosigner or guarantor before entering an agreement include:

•   Do you have a good credit score and solid financial standing?

•   Are you willing to take on this legal and financial responsibility?

•   What will our long-term agreement be if I, as the primary borrower, fail to make repayments and force you into the legal obligation to do so?

Personal Loans That Allow You to Use a Cosigner or Guarantor

Not all lending institutions allow you to apply for a personal loan with a cosigner or a guarantor. Some only allow co-borrowers. If you aren’t able to qualify based on your own creditworthiness, you may consider asking the lender if they’ll allow a cosigner or guarantor.

Getting a personal loan with a cosigner or guarantor can make it much easier to qualify for a loan because, in the eyes of the lender, a second person agreeing to take on responsibility for the loan lessens the risk of lending to you.

The Takeaway

Guarantors and cosigners fulfill similar roles for a loan applicant, strengthening the application by taking on some level of financial responsibility for the loan.

A cosigner takes on responsibility for your payments right away, while a guarantor won’t get involved in the loan unless you end up missing several payments and are considered in loan default.

Either option could help you qualify for a personal loan with lower interest rates and better terms than you might be able to get on your own. Note: SoFi does not currently offer personal loans with guarantors.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Does being a guarantor affect your credit?

Yes, being a guarantor can impact your credit. It can have a negative effect on your credit if the borrower misses payments. It can also affect your ability to secure future loans since it increases your debt-to-income ratio.

What are the disadvantages of being a guarantor?

Being a guarantor can add to your debt-to-income ratio, which can lower your credit. Also, if the borrower defaults, you are liable for the loan, and your credit can also be negatively impacted.

Are guarantors and cosigners the same thing?

Both guarantors and cosigners are responsible for a loan along with the other person who took out the funds, but a guarantor is only liable if the primary borrower defaults. A cosigner is responsible right away.

Photo credit: iStock/FreshSplash

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If you’re looking to start or grow a side hustle or small business, you might think a business loan is the right next step. A personal loan, however, is another popular financial product that you also might be able to use. For instance, by using it to free up some cash elsewhere in your budget, you could put more of your income toward funding your business.

Because there are potential benefits and disadvantages to both types of financing, it’s important to understand the differences. You’ll find that information here and be better equipped to decide whether a business loan vs. personal loan might work best for you.

What Is a Personal Loan?

A personal loan is a source of financing that a borrower typically can use for just about any legal personal purpose. That said, you typically cannot use the money from a personal loan directly for your business. You might instead use the lump sum to consolidate credit card debt, which could free up funds in your overall budget to put back into your business.

Typically, you’ll find unsecured personal loans, with the borrower agreeing to pay back the full amount, plus interest, in fixed monthly payments within a predetermined time frame.

Some lenders also offer secured personal loans, however,which means some form of collateral is involved. Also, some offer personal loans with variable interest rates.

How Personal Loans Work

When you apply for a personal loan, you can expect the lender to review your personal financial information — including your credit score, credit reports, and income — to determine your eligibility. In general, the better your credit, the better your chances of receiving a lower interest rate.

Personal loan amounts vary, but some lenders offer personal loans for as much as $100,000.

Although most personal loans have shorter repayment terms, the length of a loan can vary from a few months to several years. Typically, they last from 12 to 84 months.

What is a Business Loan?

A business loan is a type of financing used specifically to pay for business expenses. It could be used to purchase equipment or inventory, for example, or to fund a new project.

There are many kinds of small business loans available — with different rates and repayment terms — including Small Business Administration (SBA) loans, equipment loans, micro loans, and more. Rates, terms, and loan requirements also can vary significantly depending on the lender.

How Business Loans Work

Applying for a business loan tends to be more complicated than getting a personal loan. For one thing, you’ll likely have to submit more paperwork to back up your application, including your business’s financial statements and an up-to-date business plan. The lender also usually will want to review your personal and business credit scores. And you may have to be more specific about what the loan will be used for than you would with a personal loan.

If your business is brand new, lenders may be reluctant to give you a business loan. Some lenders might ask you to put up some type of collateral to qualify.

Differences Between Business and Personal Loans

There are several factors you’ll want to understand when considering the difference between a personal loan vs. a business loan, including the loan costs, how you plan to use the money, and how much you hope to borrow. Here’s a look at a few basic differences.

Cost Differences Between Business and Personal Loans

Whether you’re considering applying for a business loan or a personal loan, it’s important to be clear about how much it could cost you upfront and over the life of the loan.

Interest Rates

Interest rates for business loans can be lower than for the interest rates for personal loans, but the rates for both can vary depending on the type of loan, the lender you choose, and your qualifications as a borrower.

Fees

Fees also can affect the upfront and overall cost of both personal and business loans, so it’s a good idea to be clear on what you’re paying. Some of the more common fees for business loans and personal loans that you might see include origination, application, packaging, and underwriting fees, and late payment and prepayment penalties.

Some fees may be subtracted from the loan amount before the borrower receives the money. But fees also may be folded into a loan’s annual percentage rate (APR) instead, which can increase the monthly payment.

Down Payment

Business loans may be available for larger amounts than a personal loan. For a larger business loan — a substantial SBA loan or commercial real estate loan, for example — you could be required to come up with a down payment. This amount can add to your upfront cost. However, just as with a mortgage or car loan, a larger down payment can help you save money over the long term, because you’ll pay less in interest.

Whether you’ll need a down payment, and the amount required, may depend on your individual and business creditworthiness.

Different Uses for Business and Personal Loans

One of the biggest differences between business vs. personal loans is the way borrowers can use them.

•   A business loan can be used to finance direct business costs, such as paying for supplies, marketing, a new piece of equipment, business debt consolidation, or a business property. But it typically can’t be used for indirect business costs, which means a borrower can’t pay off personal debts with the money or buy personal property with it.

•   Some business loans have a very specific purpose, and the borrowed money must be used for that purpose. For example, if you get an equipment loan, you must buy equipment with it. Or, if you get a business car loan, you must buy a business car with the money.

•   With a personal loan, you have tremendous flexibility in how you use the loan, although that usually does not include business purposes. Rather, you can use a loan to pay off credit card debt, fund a home improvement, or pay an unexpected medical or car repair bill. Personal loans are typically smaller than business loans, and they generally come with a shorter repayment term. It can be helpful to have a clear intent for how the money will be spent and to keep separate records for business and personal expenses.

Differences When Applying for Business and Personal Loans

The criteria lenders look at can be very different when approving a small business loan vs. a personal loan. Here’s what you can expect during the application process.

Applying for a Personal Loan

When you apply for a personal loan, your personal creditworthiness usually plays a large role in the application and approval process.

•   Lenders typically will review a borrower’s credit scores, credit reports, and income when determining the interest rate, loan amount, and repayment term of a personal loan.

•   Generally, you can expect to be asked for a government-issued photo ID, your Social Security number, and/or some other proof of identity.

•   You also may be asked for proof of your current address. And the lender will want to verify your income.

Applying for a Business Loan

When you apply for a business loan, your personal finances still will be a factor, though other aspects of your application will be reviewed carefully.

•   The loan underwriters also will evaluate your business’s cash flow, how long you’ve been in business, your profitability, the exact purpose of the loan, trends in your industry, your business credit score, and more.

•   The lender may ask for a current profit-and-loss statement, a cash-flow statement, recent bank statements and tax returns for the business, your business license and a business plan, and any other current loan documents or lease agreements you might have.

•   You also will have to provide information about your collateral if you are applying for a secured loan.

Recommended: Understanding Credit Score Ranges

Structural Differences in Business and Personal Loans

Knowing the differences in how personal loans vs. business loans are structured could help you decide which is right for you and your business. A few factors that might affect your choice include:

Loan Amount

A business loan may be more difficult to apply for and get than a personal loan, especially if your business is a startup or only a few years old. But if you can qualify, you may be able to borrow more money with a business loan. While personal loan amounts typically top out at $50,000 to $100,000, some SBA loans can go as high as $5.5 million.

Loan Length

You’ll likely find personal and business loans with both short and long repayment terms. But generally, personal loans have shorter terms (typically one to seven years), while some business loan repayment periods can be up to 25 years.

Tax Advantages

If you have a business loan, deducting the interest you pay on the loan may be possible when filing income taxes if you meet specific criteria.

With a personal loan, it might get a little more complicated. If you use the borrowed money only for business costs, you may be able to deduct the interest you paid. But if you use the loan for both business and personal expenses, you would only be able to deduct the percentage of the interest that was used for qualifying business costs.

And you should be prepared to itemize deductions, documenting exactly how you spent the money. Your financial advisor or tax preparer can help you determine what’s appropriate.

Support

Along with the traditional banking services you might expect to get with any type of loan, a business loan also may come with operational support and online tools that can be useful for owners and entrepreneurs.

Risk

When you’re deciding between a personal vs. business loan, it’s also a good idea to think about what could happen if, at some point, the loan can’t be repaid.

•   If your business defaults and it’s a business loan, the impact to your personal credit would depend on how the loan is set up.

◦   If you’re listed as a sole proprietor or signed a personal guarantee, it’s possible you could be sued, your personal and/or business credit scores could take a hit, and your personal and business assets could be at risk.

◦   If your business is set up as a distinct legal entity, on the other hand, your personal credit score might not be affected — but your business credit score could suffer. And it could be more difficult for you to take out a business loan in the future.

Pros and Cons of Business Loans

There are advantages and disadvantages to keep in mind when deciding whether to apply for a business loan vs. personal loan.

•   A business loan can be more difficult to get than a personal loan, especially if the business is new or still struggling to become profitable.

•   If you qualify for a business loan, you may be able to borrow a larger amount of money and get a longer repayment term.

•   A business loan also can make it easier to separate your business and personal finances. {Personal loans typically can only be used for personal expenses, as the name indicates.)

•   There could be fewer personal consequences if the business defaults on the loan.

Recommended: Can You Refinance a Personal Loan?

Pros and Cons of Personal Loans

A personal loan vs. business loan can have advantages and disadvantages to consider.

•   Personal loans can offer borrowers more flexibility than business loans in terms of usage, though those uses must typically be for personal expenses, such as paying for a home renovation or a vacation.

•   They’re generally easier to qualify for and may have lower interest rates.

•   One major hurdle may be that you cannot use them for any business expense in most situations. You could use them to free up cash in your budget which you might then apply to a business purpose.

Is a Business or Personal Loan Right for You?

Considering the differences between a personal loan and a business loan can help you decide which is right for your needs. You may want to do some online research, compare rates and terms, and/or ask a financial professional or business mentor for advice before moving forward with this important decision. Here are some things to think about as you look for a loan that’s a good fit for your personal and professional goals.

A business loan may make sense if:

•   You’re seeking a lower interest rate and/or repayment term.

•   You want to keep personal and business expenditures separate.

•   You’ve been successfully running your business for a while.

•   You need more money than you can get with a personal loan.

•   You hope to build your business credit.

•   You want to limit your liability.

A personal loan may make sense if:

•   Your goal is to use the money for personal purposes, which might free up funds in your budget for business expenses.

•   You plan to use the money for both business and personal expenses.

•   You can find a personal loan with a lower interest rate than a comparable business loan, and the lender approves the loan for business expenses.

•   You want to get the money as quickly as possible.

•   You are seeking a shorter repayment term.

•   You don’t want to secure the loan with collateral.

•   You feel confident about your personal ability to repay the loan.

Recommended: Can I Pay Off a Personal Loan Early?

The Takeaway

If you’re seeking funding to start or grow your business, you may decide to apply for a business loan. Another approach: You might apply for a personal loan, which could be used for personal purposes, freeing up money in your budget that could go toward your business. Personal loans are typically easier to apply for and offer quicker access to funds, but often at a somewhat higher interest rate and shorter term vs. business loans. Also, business loans usually offer significantly higher loan amounts and the interest can be tax-deductible. It’s worthwhile to consider the tax and credit implications of each type of loan too, among other factors.

FAQ

Are business loans more expensive than personal loans?

Business loans typically have lower interest rates than personal loans. However, these two loans aren’t interchangeable: one is for business uses, the other for personal expenses.

Can I use a personal loan for business?

Most (but not necessarily all) personal loans can be used for just about any personal use. Check the fine print, and follow the lender’s guidelines.

Are startup loans personal loans?

There are a few different options for funding a startup, including SBA loans, family loans, or crowdfunding platforms. But if you have good credit and are confident you can make the monthly payments, taking out a personal loan could be an effective strategy for funding a startup, if the loan permits that usage.

Photo credit: iStock/MicroStockHub

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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