Whether you’re renovating a house or opening a new business, big projects require big loans. The larger the investment, the more likely a lender is to want some security to back up your loan, whether that’s a form of collateral, or a second borrower on your application. So how do you make yourself look like a desirable applicant in order to qualify for a large loan? If possible, you add a second person to the loan—ideally, a person with great credit.
Applying for a Loan with Another Person
There are two different ways to borrow with another person: cosigned loans and joint loans. A co-borrower is any additional name that appears on a loan document, and whose credit history may be used to help qualify for the loan. Co-borrowing with a joint loan or cosigning a loan can encourage a lender to give you a better interest rate. It makes the loan more secure for lenders, since two or more people are responsible for payment.
If your credit isn’t up to scratch taking out a loan with a co-borrower might be the right move. By using a cosigned or joint loan, you may end up with a better loan-to-value ratio, which is a number that describes how risky a borrower is to future lenders. The lower the loan-to-value ratio, the better you look in the eyes of a lender. If you’re planning to apply for a loan with a second person, should you choose a cosigned or a joint loan? Here’s a closer look at both options.
So what’s the difference between a cosigned and a joint loan?
Both cosigned and joint loans include an additional borrower. However, a co-borrower taking out a joint loan has different rights and responsibilities than a cosigner. Say you’re using a joint loan to open up a business. In this case, your co-borrower would have a right to any property you purchase with that loan, and he or she is responsible for monthly payments. In the case of a cosigned loan, the cosigner has no rights to property, only responsibility for the loan if you are unable to pay. So while a joint loan gives the second borrower rights and responsibility, a cosigner has responsibility but no rights.
The Advantages of Choosing a Cosigned Loan
Cosigned loans are, in some ways, simpler than joint loans. For one thing, lenders are often reluctant to issue joint loans to borrowers who aren’t blood relatives or a married couple. The reason for this is simple: In the event of a disagreement, disaster, or even death, a joint loan can be tricky because both co-borrowers have rights to the property.
However, in the case of a cosigned loan, the second borrower has no rights to the property, but still has to pay if you’re unable to. And because cosigners only take responsibility for paying the loan, there’s no risk of losing your property to them in the event of a rift.
The Advantages of Choosing a Joint Loan
The main advantage of a joint loan is that it’s easier to qualify for loans when you want equal ownership of the property in question. Joint loans are a great option for joint ventures of any kind, such as home improvements with your spouse, or opening up a business with a close member of the family. These loans are ideal for married couples or blood relatives—in fact, lenders might favor married or related applicants.
Because joint loans give both co-borrowers equal rights, it is well-suited for people who already have joint finances or own assets together. Payment methods are flexible: Either you can choose to make separate monthly payments of equal or varying amounts, or you can set up monthly payments from a joint bank account.
What’s the better loan option?
If you’re seeking a loan with a spouse or relative, and one of you has the high credit score needed to get a low interest rate and loan-to-value ratio , then a joint loan may be right for you. However, if you’d rather have a loan in your name with a little added security, but not give away rights on your investment, then having a cosigner may make more sense.
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