Let’s say you’ve decided, for one reason or another, to get a personal loan. You’ve done the research, filled out an application, and are eagerly awaiting to hear back from the lender…only to have a rejection letter show up in your email or mailbox. For those who have a weak credit score and struggle to get approved, this can be incredibly discouraging.
Fortunately, a co-applicant can offer a bit of hope and help you get the loan you need! Join us as we review the ins and outs of adding a co-applicant on a personal loan: what they are, when you’ll need one, what the pros and cons are, and how to apply with one.
What is a Co-Applicant?
Co-applicants give a lender reassurance that the loan you take out will be repaid both in full and on time. Because the lender considers both your credit and the cosigner’s credit when making the decision to approve you, having the right co-applicant increases the likelihood you’ll get the loan. There are generally two types of co-applicants: cosigners and co-borrowers.
What is a cosigner?
A cosigner is an individual who agrees to have their name added to the primary borrower’s loan application. In doing this, they decide to take an equal amount of responsibility with you for the loan. Essentially, the cosigner promises to make monthly payments and follow the repayment terms for the primary borrower if the primary borrower stops making them.
When a person cosigns for a loan, they make themselves legally liable for the debt. However, they will not have a legal claim to any services, property, or items purchased with the loan.
What is a co-borrower?
On the other hand, a co-borrower is a person whose name not only appears on the application but also on the loan itself. In this case, every individual named on the loan has a shared or equal responsibility to repay the loan. Unlike cosigners, co-borrowers on a joint loan can also have an equal right to the services, property, or items purchased with the loan.
When Does Having a Co-Applicant Make Sense?
Your debt-to-income ratio is high
Your debt-to-income ratio is calculated as the amount of debt you owe compared to your income. If this ratio is high, meaning you have a large amount of debt in relation to your income, you may want to consider a co-applicant.
Your income doesn’t meet the minimum requirements
Some creditors will only lend to those who meet a minimum income threshold. If your income doesn’t hit that threshold when you apply, a co-applicant may be able to pick up the slack.
You have a minimal or low credit history
Whether you have little or poor credit, not having a solid credit history can hamper your odds of approval. Enlisting the help of a co-applicant with an established financial history can help you qualify.
You’re self-employed
While this isn’t the case for everyone, lenders may look at a self-employed applicant and see an individual who doesn’t have a stable, predictable income. Even if the monthly payments are well within your budget, it can be hard to get approved without a co-applicant.
What Should I Look for In a Co-Applicant?
Not all co-applicants are created equal! When you apply for a loan with a cosigner or co-borrower, that lender will want to see that your co-applicant is a strong candidate who can meet their basic lending requirements. Therefore, when looking for a co-applicant, it is vital to find someone who meets these four criteria.
High credit score
Your co-applicant should be someone with a solid credit score and financial history. Lenders will look at credit reports and scores for factors such as on-time payment history, credit mix, and debt-to-income ratio to determine their ability to pay the loan in the case that you default. To increase your odds of approval, choose a co-applicant with a score of 650 or higher.
Someone you trust
When someone acts as your co-applicant for a loan, they enter into a serious financial agreement with you. You should be sure that you trust them and have a good history with them. Before turning to acquaintances, try talking to your partner, family, or a close friend about becoming your co-applicant.
High income
A strong co-applicant should have a steady income and be able to comfortably make payments on the loan in your place in the case of an emergency.
Low debt
As mentioned previously, a lender is looking for your co-applicant to have a low debt-to-income ratio. Having lower debt coupled with a higher income signals to the lender that your co-applicant has fewer financial burdens and is more likely to repay the loan.
Benefits of a Co-Applicant
The most significant benefit to having a co-applicant on a loan is that you may be able to qualify for a loan that you wouldn’t otherwise get! Whether you’re trying to consolidate debt, pay for an unexpected expense, or make a large purchase, having a co-applicant for a loan can open the door to a better loan with lower interest rates. Additionally, for those with little or poor credit, having a co-applicant will allow them to beef up a thin credit file and build a positive credit history of on-time monthly payments.
There are also benefits for the co-applicant. If the primary loan recipient is making the payments on time, it contributes to their payment history. Further, being a co-applicant can also improve their credit mix by giving them new types and lines of credit. For example, if the co-applicant has credit cards and a mortgage but no installment loans on their file, being a co-applicant for an installment loan will boost their credit score.
Drawbacks of a Co-Applicant
As with most things, having a co-applicant comes with its drawbacks. For instance, you may not be able to remove a co-applicant from a loan easily. Before you sign on the dotted line, ask your lender if they offer a co-applicant release. This release may only happen if, for example, you make your payments on time for a predetermined number of months or if your credit score improves enough to where your lender feels confident you’ll continue to make those payments on your own. If the lender doesn’t offer a co-applicant release, then the only way to remove a co-applicant from a loan is to either refinance or consolidate the loan.
It is also crucial to be sure you can afford the monthly payment before accepting the loan on the borrower’s side. A single late payment impacts not only you but also your co-applicant, and both of your credit scores may take a hit as a result. If you’re unable to make the payments at all, then your co-applicant is on the hook for the loan and will be required to pay it off before it goes into collections.
How to Apply for a Loan with a Co-Applicant
Once you’re ready to apply for your loan and you’ve checked that the lender accepts co-applicants, you’ll fill out the application with both your information and your co-applicant’s information. This information is likely to include income amounts, Social Security numbers, and current debt obligations. After that, the application process is just like the one you go through to apply for a loan by yourself: You’ll fill out the application online or in-person at a bank branch. The lender will alert you to their decision within the time they specify.
Co-applicants can be an excellent way for you to get the loan you need at a rate you can afford. To learn more about Credit Direct’s personal loans and how we handle co-applicants, please reach out to one of our loan agents!