Financing a large purchase with a personal loan can be a great way to build wealth without dinging your budget upfront. The catch? Most lenders rely heavily on your credit history to tell them if you’re a trustworthy borrower.

In these cases, if your credit score needs some TLC, you might need someone to vouch for you who has good credit so your lender will feel more comfortable doing business with you.

Guarantors, co-signers, and co-borrowers explained

If you’re contemplating applying for a new personal loan, understanding your credit score and how your lender might view it is key.

Your credit score gives your lender a better understanding of your financial habits regarding credit usage and repayment. The major credit bureaus take factors like your payment history, length of credit history, amount owed, credit mix, and new credit into account when calculating your final score.

You might need some backup if your credit isn’t up to your lender’s standards.

What is a guarantor?

A guarantor is someone who guarantees a loan like a mortgage, student loan, or auto loan — meaning that they agree to repay that loan if the borrower fails to make monthly payments on their loan.

Essentially, a guarantor’s job is to reassure your lender that they will be repaid. And if the borrower fails to make a loan payment, they’ll make those payments on the borrower’s behalf. In many cases, a borrower might lean on a guarantor if they have a bad credit score, no credit history, or earn a lower income.

Anyone over age 21 can be a guarantor with a healthy credit history. Usually, a guarantor is someone the borrower has a close relationship with like a parent, sibling, or close friend.

What is a co-signer?

A co-signer is like a guarantor, with the main difference being that a co-signer is liable for a borrower’s debt from day one, while a guarantor is only liable once the borrower fails to make payments.

Being a co-signer for a friend or loved one can help increase their chances of loan approval, but it does imply a significant risk if they don’t hold up their end of the bargain. Failure to repay their loan could significantly damage your credit score and hurt your chances of qualifying for a new loan or credit card in the future.

What is a co-borrower?

A co-borrower is a co-applicant, who shares equal responsibility for the loan along with the borrower or borrowers involved.

Having a co-borrower can make a lot of sense if you both stand to benefit from the asset that’s being financed. Say you’re hoping to open a business, you might consider applying for a loan with your business partner who will also profit from the revenue your business earns.

The upside of having a co-borrower is having someone to share the debt burden and repayment with. What’s more — if your co-borrower has a higher credit score or lower debt-to-income ratio (DTI), you may be able to qualify for a larger loan or one with more favorable terms.

What to consider before agreeing to be someone’s guarantor, co-signer, or co-borrower

Before you agree to be someone’s guarantor, co-signer, or co-borrower, there are several factors you should carefully consider to determine if it’s the right move for you.

The state of your personal finances

Sharing any portion of someone’s debt or repayment is a huge responsibility. If your personal finances aren’t in tip-top shape, you could risk damaging your credit score and hindering your chances of borrowing in the future.

Consider how much debt you currently have, if any, and whether or not you’d be able to fit an additional debt payment into your budget if the borrower fails to make payments.

The terms and conditions of the loan

Before you sign on the dotted line, you should be clear on the terms and conditions of your loan. Have a candid conversation with the primary or co-borrower to understand what the loan is for, the total loan amount borrowed, interest rates associated with the loan, and the repayment schedule and timeline.

You should also ask clear questions about your legal responsibility and understand in which scenarios you’d be responsible for making payments and when.

Your relationship with the borrower

Ultimately, taking any level of ownership of someone else’s debt is an act of trust, so you should only do so if you have full and complete trust that they will manage their debt responsibly and make on-time payments.

It’s also important to consider how sharing this debt will affect your relationship should they default on their loan.

Be sure to discuss a clear loan repayment plan and explore all possible outcomes to determine whether or not you feel comfortable taking on this new responsibility.

Your near-term financial goals

Serving as someone’s guarantor, co-signer, or co-borrower may impact your ability to hit some of your own financial goals. It’ll increase your DTI and could make qualifying for a new loan more difficult in the future.

If your financial plans include buying a home, taking out a student loan to go back to school, financing a vehicle, or other financial milestones that require the help of a lender, it may not be the time to involve yourself in someone else’s debt. This move will be reflected on your credit report and too many new credit applications in a short time could lead to a rejection and a drop in your credit score.

It can certainly be rewarding to help a loved one achieve their goals, but understanding the pros and cons can help you make a more informed decision.

FAQs about being a guarantor, co-signer, or co-borrower

Can a family member be a co-borrower?

Yes. Anyone who meets the eligibility requirements set by your lender can be a co-borrower. This includes parents, siblings, a spouse, a business partner, friends, and more.

Is a co-borrower also a co-owner?

Not always. A co-borrower shares financial responsibility for an asset, but may not always share ownership of the asset. Depending on your arrangement, the type of loan, and the ownership agreement in place, a co-borrower may also be a co-owner, but this isn’t always the case.

What happens if I am a guarantor on someone’s loan and they stop making payments?

If the primary borrower fails to make a payment on their loan, their lender will take steps to contact them and remind them about their missed payment. After a series of missed payments, the loan will enter into default, at which time the lender may contact you (the guarantor) to collect missed payments and get the loan back into good standing. If both you and the borrower fail to make payments on the loan, the lender could take legal action as a result and you’ll likely see a decrease in your credit score.

Are guarantors, co-signers, and co-borrowers legally protected if the primary borrower defaults on their loan?

In most cases, guarantors and co-signers have limited legal protections if a borrower defaults on their loan. Lenders outline the terms of the loan agreement and guarantors, co-signers, and co-borrowers are legally responsible for the loan amount. Before signing any loan agreement, it may be worth your while to speak with a legal expert who can help you understand the terms of your agreement.

Can you remove a guarantor from your loan?

Over time, you may be able to remove a guarantor from your loan if you can prove to your lender that you’ll be able to make payments on your loan without their support. You may need to refinance your loan by applying for a new loan on your own and, if approved, using those loan funds to repay your existing loan — thus, freeing your guarantor from their obligation.

You may even be able to secure a lower interest rate on your loan, depending on your credit and income.