Applying for a personal loan with a co-borrower can be a helpful solution when it comes to getting financial help for a wedding, education, home renovation, vacation, or medical emergency. It turns a personal loan into a joint loan, in which both the co-borrowers share the loan benefits and also the responsibility for EMI payments. Besides that, when borrowers apply for a personal loan with a co-borrower, they improve their chance of borrowing a higher loan amount at a lower interest rate.
Someone considering co-borrowing a personal loan must understand the arrangement front to back. Here we will discuss how co-borrowing works, what the interest rates upon it, and how it increases the chance of getting approved for a personal loan. (Check personal loan rates)
Who Is a Co-Borrower?
A co-borrower is a person who applies for a loan along with the primary borrower and shares the responsibility of loan repayment. The loan approval is largely based on the creditworthiness of both borrowers.
Joint loans are less risky for lenders because two individuals with more than one income source take the liability of repayment. If one borrower falls into a financial crunch, the other borrower takes the responsibility of paying the outstanding balance.
How Does Co-Borrowing Work?
With co-borrowing, both borrowers are equally responsible for loan repayment as soon as the lender disburses the loan amount. Both parties must provide their personal, bank, and professional details and submit the required documents. Before approving a personal loan, the lender considers both parties’ income sources, credit ratings, account statements, and employment details.
Most lenders consider co-borrowing a lower-risk option because the incomes of both parties go towards loan repayment. Consequently, co-borrowers may access a higher loan amount with lower interest rates than a single borrower. They may use a personal loan EMI calculator to calculate the EMIs and opt for a shorter loan term to repay the loan sooner.
Both borrowers are responsible for repaying the loan. If one borrower fails to make timely payments, the lender may demand full repayment from the other party. If one borrower defaults on the loan, it reflects on the other borrower’s credit report as well.
Benefits of Co-Borrowing
Rather than applying for a personal loan alone, there are several benefits of co-borrowing:
- Higher Loan Amount: Combining two applicants’ income and credit rating increases eligibility for a higher loan amount. It is because the applicants have two income sources to repay the loan, assuring timely repayment to the lender with a lower risk.
- Shared Benefits and Responsibility: Co-borrowing allows two different borrowers to share the benefits of the loan. At the same time, both the co-borrowers are equally liable to repay the loan as well. If one borrower defaults on the loan, the other borrower may repay it and save both applicants’ credit ratings.
- Greater Chance of Approval: Co-borrowing a loan helps an individual with a lower credit rating qualify for a personal loan. Since there is a lower risk involved overall due to shared repayment responsibility, the lender may approve a loan even if the credit score is lower than required.
- Lower APR: If both borrowers have a high credit score, it becomes easier for them to get a loan at a lower interest rate. Co-borrowing with an applicant with a high credit score makes an individual eligible for a lower APR.
- Reduced Debt-to-Income Ratio: Many lenders reject loan applications for individuals with a high debt-to-income ratio. It is the percentage of a person’s total monthly income going towards another loan EMIs and financial obligations. Co-borrowing adds up the incomes of both applicants, thereby reducing the DTI ratio.
Times When Co-Borrowing is the Best Option
It’s better to apply for a co borrower personal loan when both the applicants benefit from the loan and intend to repay it on time. That is why co-borrowing is the most common arrangement between spouses and business partners. For instance, when a couple plans to renovate their house, they may co-borrow a personal loan, benefit from it, and jointly repay the loan.
A Few Words of Caution
While co-borrowing has several benefits for both the parties involved, there are some crucial factors to consider:
- Defaulting on the loan will affect the credit rating of both co-borrowers.
- If the primary borrower fails to repay the loan, the liability to pay the balance falls on the co-borrower.
- Missed payments may strain the relationship of co-borrowers. If one borrower does not repay the loan and the co-borrower suffers due to it, the damage caused may be beyond finances.
With a trustworthy and reliable co-borrower whose income and credit rating are stable, loan applicants may qualify for a larger loan amount with lower interest rates. It would be a brilliant idea to pursue the loan application with a co-borrower, provided that the applicants are aware of the caution mentioned above.