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Joint Personal Loans: Compare and Apply

| Money Rates Columnist.
min read

Two-People-Getting-CreditIf you're having trouble getting approved for a personal loan, consider a co-signer for a personal loan or a joint personal loan application. Either option can help you qualify for a loan approval that you may otherwise get.

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What Is a Personal Loan Co-Signer?

A personal loan with a co-signer or a joint personal loan each has its pros and cons. Learn what's involved with either choice and consider which is best for your particular needs.

Applying for a personal loan can be tricky. That's because the lender will look closely at your credit history, credit score, income and employment status, and other factors. If one or more of these areas appears weak, lenders may not approve your application for a personal loan.

Fortunately, there are other possibilities to explore - especially if you get turned down for a personal loan. One of them is to convince another person to co-sign the loan with you.

A co-signer shares in the responsibility for repaying the personal loan. But this individual doesn't borrow the personal loan funds with you. Neither would he or she have legal ownership of anything you buy with those funds. Co-signers simply pledge that if you fail to repay the loan, they will take responsibility and pay it for you. That is a big ask.

The advantage co-signers is that their strengths - higher credit score, more desirable credit history or healthier earnings - can offset your weaknesses and make you less risky to lenders.

Co-signers can get you better terms from lenders in some cases. However, co-signing for someone is a huge favor and may put the co-signer and possibly your relationship at risk. There's no need to legally involve another person in your loan unless you've run out of options.

What Is a Joint Personal Loan Application?

Instead of seeking a co-signer, you could go a different route: Find a co-borrower. In other words, opt for a joint personal loan.

With a joint personal loan, you and another borrower share equal responsibility in repayment of the debt. The lender will evaluate each of your creditworthiness. Each of your signatures will appear on the loan documents. And the co-borrower legally will have equal access to the money and a say in how it's spent.

As with a co-signer, a co-borrower can increase your chances of getting approved for a personal loan. That's especially true if the co-borrower's credit and/or income is stronger than yours.

Good co-borrower candidates include a business partner, spouse, friend, or sibling. Often, it's someone you plan to live or work with for a long time and who shares a common interest in funding something you'll use together.

There's a catch, however. If you and the other borrower part ways, determining how to pay off the debt could be problematic. Realize that if one of you fails to pay on time, both credit scores could take a hit.

Which Option Is Better?

Which is the right choice for you: getting a co-signer or a co-borrower? The answer depends on many factors and circumstances.

If you haven't yet applied for a personal loan and are worried you could get turned down, pursuing a joint loan could be worthwhile. But it may not make sense to involve a joint borrower unless that person also needs to borrow money - ideally for a shared project or common interest, like a home remodel or business office purchase. Of course, if you don't share a common goal, you could simply elect to split the money borrowed evenly for whatever individual purposes you choose.

The risk here is if that you and the co-borrower eventually go your separate ways. Say you open a joint loan with a girlfriend because she has a higher credit score than you. You borrow $20,000 total - $10,000 for her to launch a business out of your basement and $10,000 for you to pay off high-interest credit card debt. But a year later, and with nine years left to pay off the loan in full, you two break up. It may be challenging to collect your ex's share of the monthly payment due 12 times a year going forward.

Or say your co-borrower girlfriend stops making her share of the payments. You'll be responsible for paying the monthly loan bill on your own. That could sour your relationship.

Pitfalls of Co-Signed Personal Loans

With a co-signer, you don't have to worry about collecting money from a partner or ex-partner. That's because a co-signer on a personal loan won't be repaying your debt on the loan (unless you default, in which case the lender will pressure the co-signer to repay).

But there is tremendous risk on the part of the co-signer. Any late payments by you (more than 30 days) could show up on your co-signer's credit report and FICO score. And he or she is on the hook for full repayment if you stop paying altogether. Plus, at least for the first 12 months, co-signers can have trouble borrowing because your account shows up on their credit report. Until you make at least 12 payments on time, creditors often consider your account a "contingent liability" and count it in your co-signer's debts. So no one should co-sign if they plan to apply for a mortgage, auto loan or other major debt in the near term.

Be aware that any problems related to co-signing for you could seriously strain your relationship with this person. That's one of the risks of involving a co-signer.

Lastly, keep in mind that some lenders don't accept co-signers. So you may have to pursue a joint loan option.

How Do You Find a Co-Signer for a Personal Loan?

Finding the right person to co-sign or co-borrower on your personal loan may not be easy. You should probably ask someone close to you who you trust and vice versa. Just be aware that the closer your relationship, the more endangered that relationship could become if you don't fulfill your responsibilities.

The most important criterion in a co-signer or co-borrower candidate, besides willingness to help you, is credit rating. But if your chief weakness is income, you'll also want someone who has solid earnings and less debt than you. That's why it's best to ask a friend, relative, or significant other who you're confident is financially responsible. This person should have a solid track record of employment, a healthy income, and no known record of foreclosure, bankruptcy, or repossession of goods. That often means someone older than you who owns a home and has no student loan debt.

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