There are times in life when people need to finance something they simply don’t have the money for. Maybe you’re finally looking to go back to school but need financial support, or you’ve found your dream home but can’t qualify for the mortgage amount on your own.
Whether money is tied up in long-term investments, or is just not available, being confronted with an upcoming expense without the cash for it can be unpleasant. Thankfully, there are options, even if you find yourself unable to qualify for a loan on your own.
To some, borrowing money may seem nerve-wracking. However, there are also instances in which doing so may actually put someone on the path to a more financially-stable future, say, in the case of buying property or starting up their own business. Still, no matter how savvy the expense might be, that doesn’t always make the idea of borrowing a large amount of money any less daunting.
Whether you’re renovating a house or opening a new business, big-ticket items tend to require big loans. And the larger the investment, the more likely a lender will want some form of security to back up your loan.
Depending on the size and terms of a loan, sometimes it’s worth considering possible options that might make taking on the loan less intimidating for the borrower—and less risky for the lender—such as using a co-borrower.
A co-borrower is an additional borrower on a variety of loan types who is obligated to repay the loan alongside the primary borrower and shares the responsibility of paying it back. And a co-borrower—if they have great credit and income, among other factors—may have the added benefit of helping to make the original borrower seem less of a risk to a lender.
Applying for a Loan with Another Person
Though co-borrowers may bring with them peace of mind, they also require a great deal of forethought—especially regarding who to ask. And, regardless of whether or not someone opts for a co-borrower, it’s still important for the primary borrower to get their own application in the best shape possible.
When considering how to go about finding an ideal co-borrower for your situation, the criteria can vary from lender to lender and the terms used to describe a co-borrower could vary as well.
As mentioned earlier, a co-borrower can be any additional borrower that appears on a loan document. This additional person’s income and credit history is typically verified in order to qualify and, under this kind of arrangement, everyone whose name is on the loan is responsible for ensuring that the loan is repaid.
If a potential borrower does not feel confident about qualifying for a loan or has concerns about a potentially higher interest rate due to a less-than-stellar credit history, employment, or any other reason, then finding a reliable co-borrower might bring ease to the process—and could help improve the chances of approval, along with the interest rates and terms offered.
What’s more, co-borrowing may also be a better deal for the lender. Loaning money to more than one person might make the likelihood of repayment more certain, since two or more people are responsible for repayment.
If your credit isn’t up to scratch, applying for a loan with a co-borrower might be a good option. While there are many ways to work on improving credit, sometimes improving scores can take time. And, if the loan you’re looking to take out is time-sensitive, working on raising your credit score may be moot.
By applying with a co-borrower, you may end up with a lower debt-to-income ratio (DTI), which is a number many lenders use to determine how risky of a borrower the applicant may be.
DTI is calculated by adding up all debt and dividing it by total gross income. In most cases, the lower the DTI, the better the potential borrower looks in the eyes of the lender. Much can depend on the type of loan—typically, DTI requirements are less stringent for unsecured personal loans than they are for home loans. But, again, criteria varies from lender to lender.
But if you’re planning to apply for a loan with a second person, should you choose a co-signed loan or a joint loan with a co-borrower? Let’s take a closer look at both options.
So What’s the Difference Between a Co-signed Loan and a Joint Loan?
Both co-signed and joint loans include an additional borrower. However, a co-borrower taking out a joint loan has different rights and responsibilities than a co-signer.
Depending on your lender and loan program, a co-applicant may need to apply as either a co-borrower (normally someone who resides at the same residential address) or a co-signer who would normally reside at a different address.
Say you want to take out a joint loan, 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, however, the cosigner has no rights to property, only responsible for the loan if you are unable to pay.
So while a joint loan gives the second borrower rights and responsibilities, a cosigner has responsibilities but no rights. Depending on the unique scenario you find yourself in and what the loan is for, this may prove to be a better approach.
While there is no precise formula that will tell you whether a cosigned or joint loan is right for you, you may want to ask the lender you choose if they allow for a co-applicant—and whether or not the co-applicant would be a co-signer or co-borrower, as some lenders may allow one and not the other—and then weigh the pros and cons of each type of loan before deciding which action is the best choice for you.
The Advantages of Choosing a Cosigned Loan
Cosigned loans are, in some ways, simpler than joint loans with a co-borrower. 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 the primary borrower is 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.
Most personal loans, however, will use co-borrowers, not co-signers, and, as they are typically unsecured, there is no property involved. The biggest upside to getting another person to cosign or co-borrow on a loan with you is that the addition of their (hopefully stronger) credit history and income can be the difference between your ability to qualify for a loan—whether that’s a student loan, mortgage, or other financial product you can’t get on your own—or not.
And, even if you are able to qualify on your own, but your credit isn’t up to snuff, a co-borrower may be the key to better loan terms such as a lower rate.
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. Choosing a joint loan means you are able to present a higher total income than you could alone, signaling to lenders that it’s more likely someone will be able to keep up with the monthly loan payments.
Because joint loans give both co-borrowers equal rights, they are well-suited for people who already have joint finances or own assets together. This may be something to keep in mind when deciding which option is right for you and your co-borrower.
With joint loans, payment methods are typically 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 strong credit history needed to get a low-interest rate and terms you’d prefer, then a joint loan as co-borrowers may be right for you.
However, if you’d rather have a loan in your name with a little added security, then having a cosigner may make more sense.
No matter which situation you find yourself in, it’s important to weigh all of the options and do the necessary research that will allow you to arrive at the best option. After all, taking out a loan and repaying it responsibly has the power to put someone on a path to a more secure financial future, but it can also come with risks if a borrower hasn’t done their homework.
In the end, taking out a loan can be the key to being able to take the steps necessary to build a strong personal or professional foundation. And if a co-borrower means being able to get approved for a loan with a better interest rate, then it may be an option worth considering.
If you’re looking for personal loans that accept co-borrowers, SoFi’s unsecured personal loan is a potential option. SoFi accepts co-borrowers on personal loans; the co-borrower will be equally liable for the loan, and must live at the same location as the primary applicant.
SoFi personal loans can be used for a variety of personal purposes, like renovating a home, credit card consolidation, unexpected medical expenses, or paying for that dream wedding.
The application is all online, and finding out if you pre-qualify is fast and easy. Additionally, if you’re approved, you’ll become part of the SoFi community and have access to a slew of member benefits. For example, if you lose your job, you may be eligible to pause your payments. SoFi also offers career counseling (that can help you find a new job), exclusive member events, and lots more.
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