What to Know About Co-Borrower Requirements

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ByChristopher Boston
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Reviewed byAlvin Yam, CFP
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Updated: March 6, 2024

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When it comes to personal loans, people often add a co-borrower to their loan application to improve their chances of getting approved, especially if they have a weak credit history. A co-borrower can help you get better loan terms like lower interest rates or a larger loan amount.

It's helpful for potential co-borrowers to understand the eligibility requirements set by lenders before pursuing a joint personal loan application. This knowledge ensures that both parties are prepared and meet the necessary criteria, leading to a smoother loan approval process.

What Is Co-Borrowing?

Co-borrowing is a financial arrangement where two people apply for a personal loan together. This usually makes the loan application stronger, particularly if the main person applying doesn't have a robust enough credit history or income by themselves. Adding a co-borrower can be a wise choice for many reasons:

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When to Add a Co-Borrower

Deciding to add a co-borrower to your personal loan application can be a strategic financial move under certain circumstances. This decision is typically influenced by factors that affect your loan eligibility and the terms you might receive. Understanding when it makes sense to bring a co-borrower into the equation can set you up for a successful loan experience.

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Remember, adding a co-borrower serves not just as a means to loan approval but as a way to optimize the loan's terms and manageability. It's a decision that requires careful consideration of both parties' financial situations and their ability to handle the loan's obligations.

Eligibility Requirements for Co-Borrowers

The eligibility requirements for co-borrowers are similar to those when applying individually for a personal loan. In addition to major determinants like credit score, income and debt obligations, there are additional eligibility criteria that lenders typically look for:

  • Financial History: Recent bankruptcies, judgments or liens in the last two to seven years in a co-borrower's history may make loan approval difficult.
  • Age: Most lenders set a minimum age for co-borrowers, usually 21–25.
  • Citizenship: Co-borrowers usually must be U.S. citizens or permanent residents to qualify.

Knowing these criteria in advance helps ensure that the co-borrower you choose is likely to be accepted by the lender, improving your chances of loan approval and securing better loan terms.

Credit Score

A credit score is a numerical representation of an individual's creditworthiness based on their credit history. It is calculated using various factors, including payment history, the amount of debt owed, length of credit history, types of credit used and new credit inquiries. This score helps lenders assess the risk of lending money to an individual.

In the context of personal loan applications, the credit score of a co-borrower plays a significant role. It impacts not only the likelihood of loan approval but also the loan terms. A high credit score indicates a history of responsible credit management, suggesting that the borrower will likely make timely repayments. On the other hand, a lower credit score might indicate past financial difficulties or mismanagement of credit, increasing the perceived risk for the lender.

For co-borrowers, having an ideal credit score can be make-or-break. While the definition of an "ideal" credit score can vary depending on the lender, a score of 670 to 739 is generally considered "good" by most standards. Meanwhile, a score of 740 or higher is typically considered "very good" to "excellent" and can lead to more favorable loan terms, including lower interest rates and larger loan amounts.

Income and Employment Verification

Income and employment verification is another major requirement for co-borrowers when applying for personal loans. This process involves proving to the lender that the co-borrowers have stable and reliable income sources, ensuring their ability to repay the loan. The documents required for this verification serve as evidence of financial stability and are key to the lender’s assessment. These include:

  • Pay Stubs: Recent pay stubs, usually from the past few months, are requested to show current earnings. They provide a clear, immediate picture of the co-borrower’s income.
  • Tax Returns: Tax returns, often for the last two years, give a broader view of the co-borrower’s annual income. They are particularly important for self-employed individuals, freelancers or borrowers with variable income.
  • Employment Verification Letter: Some lenders may require a letter from the co-borrower's employer. This letter should confirm their employment status, length of employment and salary details. It serves as formal proof of their job security and income.
  • Bank Statements: Lenders use bank statements to verify income and demonstrate financial stability. They also show the lender a snapshot of the co-borrower's savings and spending habits.
  • Other Financial Documents: Additional documents such as profit and loss statements or 1099 forms might be necessary for self-employed co-borrowers. These provide further evidence of their business income and financial health.

By verifying income and employment, lenders can determine whether the co-borrowers have a steady income source to meet monthly loan repayments. This verification also helps lenders calculate the DTI ratio, another relevant factor in determining loan eligibility and terms.

Debt-to-Income (DTI) Ratio

The DTI ratio is a percentage that compares an individual's total monthly debt payments to their gross monthly income. It's a tool lenders use to gauge how much of a borrower's income is already dedicated to debt and what portion is available for new borrowing.

When it comes to personal loans, the DTI ratio plays a significant role in influencing the lender's decision. A high DTI ratio indicates that a large portion of the borrower's income is tied up in existing debt repayments, signaling a potential risk for the lender. On the other hand, a lower DTI ratio suggests a more favorable balance between income and debt, making the borrower a more appealing candidate for the loan.

For co-borrowers, an ideal DTI ratio is typically 35% or lower. This level indicates a healthy financial situation, where debt is well-managed relative to income. Ratios between 36% and 49% might still be acceptable, but they often warrant a more detailed review by the lender.

How to Get a Personal Loan With a Co-Borrower

Applying for a personal loan with a co-borrower generally follows a process similar to that of individual applications. However, an additional party's involvement means a few extra considerations. Here's a step-by-step guide to navigating this process:

1

Choose the Right Co-Borrower

Selecting a suitable co-borrower is the first step. Choosing someone with a strong credit history, stable income and reliable financial track record is essential. Talk with your potential co-borrower about their willingness and ability to share responsibility for the loan. Ensure you understand the implications of co-borrowing, including the impact on credit scores and the joint responsibility for repayments.

2

Assess Your Financial Situation and Needs

Both you and your co-borrower should thoroughly evaluate your financial situation. This includes checking credit scores, incomes, existing debts and understanding how much you need to borrow. Assessing your combined financial health will help determine your eligibility for a joint personal loan and the amount you can comfortably repay. This step helps ensure the loan is manageable for both party’s finances.

3

Explore Different Lenders

Not all lenders accept applications with a co-borrower, so it's essential to research and identify those that do. Look into various financial institutions, including banks, credit unions and online lenders. Each lender will have different terms, conditions and interest rates for joint personal loans. Finding a lender that accommodates co-borrowers and suits your specific financial needs is key to a successful application.

4

Compare Loan Offers

Once you've identified potential lenders, compare their offers. Pay attention to interest rates, repayment terms, fees and any additional benefits or drawbacks. Remember, the ideal loan offer should balance affordability with favorable terms for both borrowers.

5

Submit the Joint Application

Complete the application together after choosing the best loan offer. This will involve providing detailed personal and financial information for both co-borrowers. Be thorough and accurate in your application to avoid delays. Keep communication open during this stage, as both parties will need to provide necessary documentation and possibly respond to lender inquiries.

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MONEYGEEK EXPERT TIP

Once approved for a joint loan, make payments on time per the repayment schedule. Late or missed payments or a loan default on a joint loan will negatively impact the credit scores of both co-borrowers. Both borrowers should monitor their credit reports regularly for accuracy or issues. — Alvin Yam, CFP®

FAQ About Co-Borrower Requirements

Navigating the concept of co-borrowing and understanding its requirements can often lead to questions. To help clarify common uncertainties, MoneyGeek compiled a list of frequently asked questions below.

While both co-borrowers and co-signers are responsible for the loan, a co-borrower typically uses the loan (like in a joint mortgage). In contrast, a co-signer guarantees the loan but doesn't benefit from it or have ownership in the loan's purpose.

Not exactly. A co-borrower must meet specific eligibility criteria set by the lender, such as a minimum credit score, stable income and acceptable debt-to-income ratio. Additionally, they should have a trusting relationship with the primary borrower, as they're entering into a financial agreement together.

Yes, it often does. Adding a co-borrower with a strong credit profile can lead to better loan terms like lower interest rates, higher loan amounts and more favorable repayment terms.

Yes, co-borrowers are jointly and individually responsible for repaying the loan. This means if one borrower defaults, the other co-borrower becomes solely responsible for the full payment amount.

Generally, refinancing is the only way for a co-borrower to be removed from the loan. The remaining borrower must qualify for the loan on their own to refinance it solely in their name.

When two people co-borrow a loan, they both share the responsibility. If one person can't make payments, the other must pay the full amount, which can be a significant financial burden. Also, if payments are late or missed, both people's credit scores can decrease. This means that both co-borrowers' credit histories are linked as long as the loan lasts.

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About Christopher Boston


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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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