Applying for a loan can sometimes be difficult, especially if you have a low credit score or limited credit history. However, one way around this is to apply with either a cosigner or co-borrower - but what's the difference?
What Is a Cosigner?
A cosigner is a person who agrees to take on responsibility for repaying a loan if the initial borrower fails to pay. Lenders typically want cosigners to have better credit or a higher income than the original borrower.
Cosigners are often family members such as a parent or spouses.
Pros of Cosigner Loans
One of the benefits of having a cosigner is that people with lower credit scores who struggle to get approved could get a boost to their credit score.
For example, if a person straight out of college has a minimal credit history, they may struggle to get a personal loan. However, if a parent with a higher income and credit score agrees to be a cosigner, this could help the primary borrower start to build a good credit history.
Applying with the security of a cosigner makes the approval decision for lenders much more straightforward. A cosigner means less risk for them because there's essentially a backup person to repay the loan, so it's easier to get approved.
Whether the loan is for an apartment, a new car, or something else entirely, cosigners can lend a hand to a loved one to get the funding they need.
Cons of Cosigner Loans
Disagreements or failure to make payments could cause relationship issues between the cosigner and the primary borrower.
One reason cosigner loans exist is to help those who struggle to get approved for loans independently. This means that the cosigner potentially takes on a greater risk to their own finances if the primary borrower fails to make payments.
If a cosigner has to take responsibility for the primary borrower's loan due to missed payments, this puts financial strain on them.
It could also make it harder for the cosigner to get future credit because they have another loan to take care of. A history of missed payments could affect their credit score as well.
What Is a Co-Borrower?
Co-borrowers involve a joint loan application between two people. Both borrowers apply together, get access to the loan funds, and are jointly responsible for repayments.
This lowers the lender's default risk as the borrowers will be paying from potentially two sources of income. Lenders may be more willing to approve larger loan amounts due to the lower level of risk.
Pros of Co-Borrower Loans
Adding an additional borrower reduces the risk of defaulting on the loan, so lenders may be more likely to offer favorable interest rates.
With two borrowers and potentially two sources of income, lenders will be more inclined to approve larger loan amounts, so if you need a loan for a big renovation project, a co-borrower could help.
Co-borrower requirements involve looking at the income of both borrowers, which means lenders are much more likely to approve your application.
Cons of Co-Borrower Loans
As a co-borrower loan requires the input of two people, there's always the risk that one person falls behind on payments. For example, if a married couple gets a co-borrower loan and then gets divorced or experiences financial hardship, it can be more difficult to repay them on time.
Both co-borrowers may have the best intentions when applying for the loan. But if things change, and if one co-borrower fails to meet their repayments, this could damage your relationship, not just your finances.
You both legally agree to repay the loan by applying with a co-borrower. However, any missed payments could affect both of your credit scores.
Also, when lenders conduct a hard credit search, this could cause the scores of both borrowers to dip as well, albeit temporarily.
Alternatives to a Cosigner or Co-Borrower Loan
- Bad credit loans: If you're considering a cosigner or co-borrower due to low credit, it may be worth looking into bad credit loans instead.
- Use a cosigner service: If you are trying to rent an apartment, cosigner services guarantee your rent payments if you can't meet them. There's usually an application fee, and you must find a landlord that will accept a cosigner service.
- Repair your credit score: Instead of taking out another loan, it may be worth trying to repair your credit score. By taking actions such as lowering your credit utilization, paying existing debts on time, or checking your credit report for errors, you can start to improve your score. Once your score is higher, you may not need a cosigner or co-borrower.
Is a Cosigner or Co-Borrower Loan Right for You?
Taking all of the above into account, it's worth considering both options if you want to apply for finance. If you simply need help getting approved and have a stable income yourself, a cosigner loan could be a good fit.
If you want a joint application where you share the loan amount and repayment responsibility, then a co-borrower loan will be best.
However, in either case, there are risks to be aware of, including increased financial strain, credit score fluctuations, and potential relationship damage if one person stops making payments. That's why any cosigners or co-borrowers should think carefully before agreeing. A contract outlining the terms of the agreement between you may help to ease any worries.
For help with applying for an online installment loan, learn more about Jora Credit, or apply directly.