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How to Protect Yourself When You're a Co-applicant
By Stewart Pelto on July 28, 2010

MP900422855-(2).jpgA co-applicant applies for a loan alongside his partner applicant, with the sum total of their credit histories determining the loan’s size and interest rate. This can help business partners secure a bigger loan or help a friend with poor credit ride your coat-tails to success. DANGER, DANGER: if your co-applicant skips town, you’ll be on the hook to pay up. All of it.

A co-applicant differs from a co-signer in that the former enjoys all the privileges of co-ownership, whereas the latter exists solely to strengthen another’s poor credit history. Regardless of which one you choose to be, you run the same risk of being saddled with the entire debt.
Some tips to protect yourself and your credit score:
  1. Make sure you know your co-applicant really well. If you don’t know him like the back of your hand and have the back of your hand memorized, back away from the application form.
  2. Ask your co-applicant to purchase loan insurance that will cover his share of the costs should he fall ill, injured, or dead. Did he dodge the question? Back away from the application form.
  3. Is your co-applicant making enough money each month to meet his payments? It’s a basic question. If he isn’t, back away from the application form.
  4. What’s the loan’s context? Are you going in with a business partner or helping out family and friends? Does your business partner want funds to grow the business or funds for his extravagant lifestyle? Does your family really need the money or are they playing the “We’re related!” card to score some cash?
Back away from the application form! Jump back from that thing! If you aren’t 10,000% certain you won’t be hung out to dry, chances are you’ll be hung out to dry. Nevertheless, you could think about being a co-applicant to give your children a leg up on establishing their credit or to go in on a house with your wife (who you are 10,000% certain is your forever for-all-eternity soul mate).

The bank doesn’t have much reason to trust your co-applicant. Why should you?
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