WWhether you need to get a mortgage with your spouse or finance an inventory with a business partner, a co-borrowing deal can be a useful solution. These joint loans allow borrowers to share the direct benefit of the loan while sharing the repayment responsibility.
Applying for a loan from a co-borrower also improves your chances of getting a higher loan amount and competitive interest rate because the lender considers two incomes for repayment instead of just one.
If you are considering becoming a co-borrower, or if someone has asked you to be a co-applicant, it’s important to understand joint loans from cover to cover. We will walk you through it term of the loan to show you how co-borrowing works, how it differs from co-signing, and other considerations to help you make the right decision.
What is a co-borrower?
A co-borrower, or co-applicant, is a person who applies for and shares responsibility for repaying a loan with another borrower; approval is based on the creditworthiness of the borrower. Joint loans are less risky for lenders because they are repaid by two sources of income, rather than by a single borrower. In a joint loan, both borrowers own the loan proceeds and are also responsible for repaying the loan balance.
Co-borrower vs co-signer
Co-signers, on the other hand, generally do not benefit from the loan. Instead, the goal of a co-signer is to help the principal applicant qualify for a loan that they would not otherwise qualify for. A lender takes the credit rating and income of the co-signer into account when assessing the borrower’s application.
Unlike co-borrowers, co-signers do not own the loan proceeds or collateral and are not responsible for making payments unless the primary borrower does not.
How a joint loan works
With a solidarity loan, the co-borrowers assume equal responsibility for repaying the loan as soon as it is disbursed. When the loan is tied to a specific asset or collateral, such as an automobile, each borrower also has equal ownership of that asset. Keep in mind, however, that not all lenders offer joint loans, so check with your lender before considering a joint application.
When applying for a joint loan, check the “joint†or “co-request†box in the application to demonstrate your intention to have a co-borrower. It also ensures that the lender requests all the personal information and documentation needed from both parties. At a minimum, both applicants should expect to provide their Social Security Numbers (SSNs) for a credit check, documentation of their income, and contact details for employment verification.
Lenders often view joint loans as less risky because two income will go towards payment. For this reason, borrowers can access higher loan amounts and lower interest rates than they could without a co-borrower.
Each borrower is responsible for making the payments once the lender approves the loan and disperses the funds. If a co-borrower does not make their payments on time, the lender can demand repayment of the entire loan amount from either party. Ultimately, if a co-borrower defaults on the joint loan, this will be reflected on each borrower’s credit report.
When is a co-borrower a good option?
Co-borrowing is an appropriate option when both borrowers benefit directly from the loan and when both parties intend to make payments. For this reason, joint loans are most common between business partners and spouses.
For example, if two business partners are starting a new business, they can apply for a joint loan so that they can both benefit and repay the funds. Likewise, two spouses who plan to buy and pay off a new home together can do so as co-borrowers on their mortgage.
When to use a co-signer instead
Alternatively, a co-signer is more appropriate when a primary borrower needs help qualifying for a loan, does not plan to split the loan with the other borrower, and appeals to a co-signer with stronger credit to help out. strengthen its demand. In this case, only one of the borrowers benefits directly from the loan, and the primary borrower is the only one initially responsible for making the payments.
Related: How to find a co-signer
When to avoid using a co-borrower
Joint loans can be mutually beneficial for both co-borrowers, but it’s not always the best option. For example, having a co-borrower can help someone with a low credit score qualify for a loan, but a low score will likely result in a higher interest rate or loan amount. For this reason, if your spouse, business partner, or other potential co-borrower has a low credit rating that might not qualify, it may be best to apply individually.
Also think of someone who needs take out a personal loan to cover emergency auto repairs or other expense. Because he has a low credit score, he asks his sister to sign on as a co-applicant to improve his chances of approval and hopefully get a lower rate. However, the sister will not benefit from the loan, so it does not make sense to take responsibility for the payments. In this case, it makes more sense for the sister to serve as a co-signer.
Benefits of co-borrowing
- Lower annual rates (APR): If both borrowers have a good credit rating, it is usually easier to qualify for a loan. APR or interest rate. That said, if you are considering a joint loan with, say, your spouse, and they have a low qualifying credit score, you might be better off applying individually.
- Higher loan amounts: As with interest rates, combining credit and the income of two co-applicants can lead to a higher loan amount. Indeed, the loan will be repaid using two incomes.
- Borrowers share the benefits and responsibility: Joint loans allow two borrowers to share the benefit and responsibility of a loan. However, keep in mind that if one co-borrower defaults, the other borrower is responsible for the outstanding balance.
- More chances of approval: As with co-signers, adding a co-borrower to an application can help a borrower with less credit qualify for a loan. That said, if one of the co-borrowers has a low credit score, the lender is less likely to offer a competitive offer. This means that the most qualified co-borrower could find themselves stuck paying off the loan at a much higher interest rate.
Disadvantages of co-borrowing
- Full responsibility: In addition to having full ownership of the loan proceeds, the co-borrowers take full responsibility for repayment of the loan. Thus, if one co-borrower fails to make their payments, the other will have to repay the entire loan amount.
- Possible damage to credit score: When the co-borrowers take out a joint loan, they share the payment responsibilities. For this reason, if they miss payments, both borrowers are likely to see their credit rating drop.
- Tensions on relationships: The damage that missed payments can cause on a joint loan is not limited to borrowers’ finances. Co-borrowing can also strain the relationship if one borrower fails to make their payments and the other suffers.
- Loss of warranty: If the lender demands collateral to secure a joint loan and a co-borrower does not make a payment, both parties risk losing the asset. In the case of an auto loan or a home loan, it could mean the loss of your house or your car.
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