The ultimate guide to personal loans with a co-applicant

From how to apply for loans with a co-applicant to understanding the risks, this article got you covered

By Marcel Deer

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27 October 2023

Joint personal loans are a smart and convenient way to borrow money with a partner, family member, or friend. That’s because your combined credit scores, assets, and income let you secure a bigger loan.

But, as with all financial agreements, personal joint loans have risks.

So, before signing on the dotted line, following is a review of how they work, the benefits and drawbacks, and how the process works when applying for joint applicant personal loans.

What is a co-applicant personal loan?

A joint personal loan is a type of loan that is taken out by two individuals who are equally responsible for repaying the borrowed amount. Such loans can either be secured or unsecured.

A secured joint loan requires the borrowers to pledge a valuable asset, such as their home, as collateral for the loan. An unsecured joint personal loan does not require any collateral.

The difference between a joint loan and co-signing

With joint borrower personal loans, all parties are responsible for making regular monthly payments. Conversely, co-signers only have to make payments if the primary borrower defaults.

Essentially, co-signers are backups who don’t have ownership rights. They merely offer financial surety to lenders. For example, if a young adult has no credit history, their parent can co-sign a car loan.

Joint loan qualification requirements

Lenders typically require a minimum combined credit score of 640-650. But a score of 580-600 might be acceptable when one borrower has excellent credit.

Then, there is also current income to consider. Generally, borrowers must demonstrate a reliable and sufficient source of income to repay the loan.

But that’s not all.

Your debt-to-income (DTI) ratio should be below 36%, meaning no more than 36% of your current income should go toward paying debt. You can calculate your DTI by dividing your monthly debts by your income.

So, if you pay $2,000 on debt payments per month, and your monthly income is $6,000, your DTI is 33.3%.

A low DTI indicates you are less likely to struggle to make loan payments and are less of a financial risk—a win for lenders. It also suggests more disposable income to qualify for a larger loan.

Do you need to be married to apply for a joint personal loan?

You can apply for a co-borrower personal loan with anyone you choose: a partner (even if you are not married), a friend, or one or multiple family members.

Some lenders view married applicants as less risky, but this depends on individual lender requirements. If unspecified, contact your bank, credit union, or private lender to confirm.

Pros and cons of personal loans for two applicants

Before seeking a joint loan, weigh the pros and cons carefully

Pros

Improved chance of qualifying: The right co-borrower can make a massive difference if you struggle with a low credit score or a high debt-to-income ratio.
Shared costs: Sharing the burden of a personal loan is easier with a co-borrower, as you are both equally accountable for repayment.
Qualify for a larger loan: Lenders are more confident in your ability to meet your monthly financial obligations and ultimately clear your debt when two borrowers are involved.

Cons

Credit risk: If one of you misses a payment, it can negatively impact your credit scores because you are both co-owners of the loan.
Full debt liability: Your co-borrower's failure to pay still makes you liable. Consequently, joint debts may become complicated during a divorce or separation.
Strained relationships: If one person does not fulfil their payment obligation, it may strain the relationship.
Difficult to qualify for new credit: An additional loan increases your DTI, lowering chances of further credit approval, despite the shared responsibility for payments.

When to consider personal loans with a co-applicant

For couples, joint personal loans can help plan for significant expenses. From a dream wedding to a well-deserved vacation, they provide the financial support needed to make these special moments a reality.

Similarly, family members can use joint personal loans to pool resources and tackle high costs together for home renovations or medical treatments.

Plus, the flexibility of joint personal loans means they can fund the adoption of a child, start a business, or even provide much-needed financial support for couples undergoing fertility treatments.

How to apply for joint personal loans

Applying for a joint personal loan follows a similar process to other types of loans:

Check eligibility requirements: Have a clear understanding of how much you can afford to borrow. This will help you decide on the best repayment terms and interest rates.
Pre-qualify with multiple lenders: Get quotes from online lenders, banks, and credit unions with your co-borrower. This allows you to make an informed decision before committing to a debt. For example, some lenders may charge origination (processing) fees, ranging from 1% to 10% of the loan, while others have early payment penalties.
Apply for the loan: Check with your lender beforehand to ensure you have the required documents, such as bank statements, income verification, and so on.

After you apply, your lender will perform a hard credit check by requesting credit reports from one of the major credit bureaus (Equifax, Experian, or TransUnion).

Note that a hard credit inquiry can temporarily lower your score by 5-10 points. It may appear on your report for up to two years, but its effect lessens over time.

Get a contract to make sure you’re on the same page

A shared personal loan provides a larger loan amount as well as the ability to negotiate for more favorable repayment terms and interest rates.

Before co-applying for a joint personal loan, ensure that you fully agree to all the terms and conditions and are dedicated to meeting payment deadlines.

Having a contract when making a financial agreement with someone else is also wise. This protects you and your co-borrower in case unexpected circumstances make the loan challenging to manage.