Personal Loans With a Cosigner vs. Co-borrower: What to Know Before You Apply
If you’re just starting out, don’t receive steady paychecks, or have had some financial hiccups in the past, securing a loan on your own may not be easy at first glance. However, you might be able to get a personal loan by applying with another person on your application.
Applying with another person can give you the boost you need to get approved (and maybe even secure a better loan than you could get on your own). But asking someone to sign along with you on the dotted line comes with considerations and risks both for you and for them. What is the difference between applying with a cosigner vs. a co-borrower? Here’s everything you need to know before you apply.
What is a Cosigner?
When you get a loan with a cosigner that person agrees to take equal responsibility for the loan with you, essentially, promising to make payments for you if you stop making them for any reason. While a cosigner is legally liable for the debt, they may not have legal rights (ownership interest) to the property, items, or services purchased with the money. In other words, agreeing to be a cosigner is a generous act.
If a cosigner has a solid income history and a good credit score, lenders may be more willing to approve your loan—and possibly offer you a lower interest rate—even if your credit isn’t great. However, if you do miss payments, both you and your cosigner’s credit history will be negatively impacted.
What is a Co-borrower?
A co-borrower is any additional borrower whose name appears on a loan application and whose income and credit history are used to help qualify for the loan. In this situation, each person named on the loan has an equal, or shared, obligation to repay the loan. Co-borrowers on a joint loan may also have equal rights (ownership interest) to the property, items, or services purchased with the money.
Cosigner vs. Co-borrower
Depending on the type of loan you’re looking for (auto, mortgage, personal loan), you and your cosigner or co-borrowers’ obligations will be different. The distinction between what is a co-signer and what is a co-borrower varies with the type of loan. For example:
Let’s say your friend Mike (whose great credit history could help you qualify) agrees to cosign your auto loan. The loan will likely appear on both of your credit reports, Mike won’t have property rights to the car or access to the money, however, he will be responsible for making your car payments if you default on the loan.
Now, let’s assume you and your friend Mary decide to get a joint personal loan, and become co-borrowers, or 50/50 partners, on the loan. You’ll both sign the loan application, and both of you will be legally liable (responsible) for making payments on time and repaying the loan in full. And as a co-borrower on the joint personal loan, Mary also has rights to the money, just as you do.
Joint Personal Loans With a Co-borrower Versus Personal Loans With a Cosigner
When it comes to personal loans, the terms “cosigner” and “co-borrower” are often (mistakenly) used interchangeably, which can be confusing. What’s important to keep in mind is that most joint personal loans (such as those through LendingClub) will require a co-borrower. In this case, two individuals apply jointly, both are obligated to repay the loan, and both have rights concerning the loan proceeds.
Why You May Need a Cosigner or Co-borrower
In life, we all run into unexpected financial emergencies. It isn’t uncommon for car repairs, needed home improvements, and increasingly expensive veterinary bills to exceed what you can comfortably pay. In fact, a study by the Consumer Financial Protection Bureau found 40% of Americans can’t cover a $400 emergency expense from their savings alone.
While a personal loan can help bridge the gap, lenders typically require that customers meet certain criteria before loan approval. If you don’t meet these key requirements (which can vary from lender to lender), having a co-borrower or cosigner who does (or who can help you meet them) can mean the difference between get approved and being denied:
On the FICO scale, a credit score of 700 or above is usually considered “good.” If your scores are in that range, you’re more likely to get approved. Anything less, and lenders may see you as “risky.” If your credit scores fall in the 600 range, you may still get approved, but it may be at a higher interest rate. Often many lenders consider scores below 600 as poor credit or bad credit.
If you’re just starting out, you likely don't have bad credit, but you may not have much credit history built up at all. Without much credit history (also known as having a "thin file"), lenders are not able to predict how you’ll manage a loan or make loan payments. If you’re still in college or have just started your first job, for example, you may need to get a loan with a cosigner or co-borrower.
Not enough income
Lenders want to make sure you have steady cash reserves to make your monthly payments. If you’re not working, or work as a contractor or freelancer, proving your income will be more difficult.
What You Should Look for in a Cosigner or Co-borrower
Not just anyone can sign a loan with you. When you get a loan with a cosigner or co-borrower, lenders want to see that your cosigner or co-borrower can meet their basic lending requirements for approval. Before you decide who to ask, it helps to think about it from the lender’s point of view:
700+ credit score
Your cosigner or co-borrower should have a solid financial history and, ideally, an excellent credit score. Typically, lenders look at credit reports (on-time payment history, credit mix) and credit scores to determine someone’s future ability to pay. Look for a cosigner or co-borrower with a FICO score of 700 or higher.
How much debt a borrower has plays a factor in their ability to repay. Lenders typically look for cosigners or co-borrowers with a good debt-to-income ratio (how much debt they have compared to what they generate in income). Lower debt and higher income signifies your cosigner or co-borrower has less financial strain and is more likely to be able to repay the loan in the eyes of the lender.
Your cosigner or co-borrower should have enough steady income (relative to their expenses) to comfortably make monthly payments on the loan amount if you were to default.
Finding a Cosigner or Co-borrower
Lenders can’t specify who, such as your spouse, cosigns or co-borrows with you. As long as that other person meets the qualifications, you can ask anyone you want to be your personal loans cosigner or co-borrower. But keep in mind you’ll be in this loan with them for several months, if not a year or longer, in many cases. Be transparent with them about your situation, and ensure it won’t damage your relationship. It is totally up to you, but here are a few ways to go about it:
Develop a plan for paying back your loan
Before you decide who you’ll approach to cosign or co-borrow, decide how you will pay back the loan. Creating a solid repayment plan on paper can help show your cosigner or co-borrower you’re committed to seeing the loan through.
Ask a family member
Borrowers often ask their parents or siblings to cosign or be a co-borrower for a personal loan for a good reason: They know you. The people you know best know why you may have had financial hiccups in the past and just how hard you’re working to correct it.
Go to someone you trust
Your partner, a mentor, or even a trusted family friend can all act as your cosigner or co-borrower. The key is finding someone you trust since you’ll be entering into a financial agreement together.
Consider your relationship
Before you ask, give the idea some careful consideration. If, for example, you’re not sure your cosigner or co-borrower will still be in your life months or a year down the road, being on a loan together could be tricky. And if you’re not sure how they’ve managed their money in the past, you may have a harder time getting approved.
Personal Loans With a Cosigner FAQ
Still have questions? Some of these commonly asked questions may provide the answer.
1. Am I required to have a cosigner or co-borrower on a loan?
If you can qualify for a personal loan, auto loan, auto refinance, or mortgage loan on your own, you don’t have to have a cosigner or co-borrower. However, if your debt-to-income is on the high side and you’re on the cusp of approval, you might get a better loan term or interest rate if you apply with another person with a stronger credit profile.
2. When is it better to have a cosigner or co-borrower?
If you’ve had credit problems in the past or don’t have a lengthy credit history, having a cosigner or co-borrower can help you get approved. It’s especially helpful if you freelance or rely on income from side gigs (e.g., Uber driver, Instacart shopper, etc). An inconsistent income can be difficult to prove and having a cosigner or co-borrower with a steady paycheck can help offset that.
3. Will it hurt the cosigner’s or co-borrower’s credit score?
Initially, depending on your cosigner’s or co-borrower’s overall credit picture, the loan might increase their overall debt-to-income ratio, which is one factor credit bureau’s use to determine credit score. However, as long as you make your monthly payment on time and pay off your loan by the end of the term and don’t take on any new debt, it shouldn’t hurt your cosigner’s or co-borrower’s credit score in the long run. If you don’t make timely payments, it could hurt their credit score.
4. What happens if I’m late making payments on a loan?
Anytime you make a late payment, your lender can report that information to the credit bureaus, which could ding you and your cosigner’s or co-borrower’s credit. If you miss several payments in a row and wind up defaulting on the loan, your cosigner or co-borrower will be responsible for making those payments and, quite possibly, paying off the loan balance in full.
5. Can I get a loan with a cosigner or co-borrower through LendingClub?
While you cannot have a cosigner on a personal loan through LendingClub, you can apply for a joint personal loan with a co-borrower. For example, let’s say your credit history is not strong and you and your spouse need to pay off some medical bills. If you’re not sure you’ll qualify on your own—you might consider applying for a joint personal loan with your spouse, as long as they have a stronger credit profile that will improve your chances of approval.
The Bottom Line
If you'd like to apply for a joint personal loan with a coborrower—or borrow money in any form—first consider your whole financial picture and decide what’s best for you. If a personal loan sounds like it might be a good fit, check your rate through LendingClub, with no impact to your credit score.*
*Checking your rate through LendingClub generates a soft credit inquiry, which is visible only to you. A hard credit inquiry that may affect your credit score only appears when your loan is issued.