Co-signing 101: Applying for a loan with a co-borrower

If you’re struggling to qualify for a loan, you can have a friend or family member step in to help. But first, both sides should weigh these considerations before signing into any financial agreement.

For college students and other young people, getting a loan typically isn’t as easy as walking into a bank and filling out some paperwork. Financial institutions understandably want to know the money they’re lending will be paid back. People who are too young to have earning power or lengthy credit histories simply aren’t attractive to lenders. In these circumstances, a co-applicant – otherwise known as joint owner – might help the primary borrower’s chances of securing a loan.

Whether you’re the young person seeking the loan or the older adult (typically a parent or grandparent) considering being a co-applicant, you’ll want to weigh the following considerations before stepping into any kind of financial arrangement.

First things first: Do you really need a loan?

To a large degree, money is personal. How you choose to spend it is, ultimately, your business. But a loan technically isn’t your money. It’s money you’re borrowing and will have to pay back – with interest. If you’re asking a parent or grandparent to be a co-applicant, be mature enough to approach them with questions already answered, perhaps written down in a proposal format:

• Why are you seeking the loan? 
• Is this a need or a want? If it’s a need, explain why. If it’s a want, explain your rationale.
• What is the amount?
• Why is that particular amount needed?
• How is this loan going to benefit you?
• What is your plan and timeline for paying off the loan?
   

Protect the relationship you have with your desired co-applicant by being completely honest about your goals. If he or she agrees to be a co-applicant, be thankful. If not, respect the decision and move on. You’ll want the same respect someday if you’re ever on the receiving end of a similar request.

The upside of a co-borrowed loan

From the standpoint of a college student or other young borrower, the upside of a co-borrowed loan is obvious: You’re more likely to get a loan. Adding a co-applicant’s financial profile – credit history, income and savings – to your application will greatly increase your chances of obtaining a loan. Not only that, but the terms of the loan (the interest rate, for example) are likely to be more favorable.

Benefits exist for the older adult serving as co-applicant, as well. For starters, you’re helping your child or grandchild establish a solid credit score, which has far-reaching financial benefits. You’re also supporting whatever life goal the loan is funding. Just be sure to enter the arrangement with eyes wide open. If you’re not going to be okay – either financially or relationally – if your co-applicant doesn’t pay off this loan, don’t enter into the commitment in the first place.

How to obtain a co-applicant loan

A personal banker can be a great resource to help you navigate the loan application process. If you have questions about how to get started, talking to a banker is a good first step. 

If you already know that a co-borrowed loan is your goal, schedule a meeting with your personal banker, and bring the potential co-applicant with you to the appointment. Your banker will guide you through all of the loan options and considerations to make sure it’s a wise way to move forward.

Remember: you’re both at risk

In a co-applicant situation, which is typical with credit-card applications for example, the responsibility of each person on the account is the same. It can therefore be detrimental to both applicants’ credit if the relationship goes sour, or for any other reason the balance of the loan goes unpaid. Being clear on the potential negative ramifications of a co-applicant loan is essential.

All this said, it’s important to note that ultimately, a co-applicant loan can be an enormously helpful financial tool that makes both parties happy – and keeps them financially secure. 

Student loans and co-signers

Because of its popularity, student loan co-signing deserves some special attention. When parents (or grandparents, aunts, uncles, or friends) agree to co-sign a student loan, they are essentially giving control of their credit to the primary borrower. Why? Once a student loan is approved, its payment history will show up on the co-signer’s credit report – and any missed payments can hurt your credit. As with all “shared” loans, it’s important to enter into this financial relationship fully informed and fully ready to take on whatever responsibilities might be required of you as a co-signer.

Need to obtain a co-borrowed loan? Make an appointment with a banker to begin the loan process.