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Once you begin looking for financing options, you may find your search leads you to multiple forms, including personal loans. One choice available to prospective borrowers is a short-term loan.

A short-term loan is a personal loan that can help with personal financial needs. But this type of loan may not fit every situation, since it typically only provides limited funds. Read on to find out whether a short-term loan may help you meet your financial goals.

What Is a Short-Term Loan?

When you take out a short-term loan, you borrow funds to address immediate financial needs for a limited period. These loans serve a variety of functions, depending on your situation. For example, individuals may take out a short-term loan to keep them afloat until their next paycheck.

Or, someone running their own business who needs to cover small expenses may take out a short-term business loan.

Recommended: Personal Loan Guide for Beginners

How Do Short-Term Loans Work?

Essentially, short-term loans operate on a short time scale. The approval process and repayment schedule occur quickly, usually within a year.

Average personal loan interest rates range from 5.99% to 36% APR, depending on the applicant’s creditworthiness. Short-term loans tend to be near the higher end of this scale, in addition to fees and penalties that may be charged by a lender.

However, lenders such as banks or credit unions offer varying personal loan terms and rates. So, it’s important to research and shop around before you apply for one.

What Can You Use a Short-Term Loan For?

Short-term loans can be used for many purposes when you need quick access to money and your cash flow is low. You can use the funds from a short-term loan to cover unexpected costs such as medical bills or for everyday expenses until you reach your next paycheck.

Businesses might use short-term loans in the form of merchant cash advances so they can replenish inventory or purchase new equipment even when short on cash. In this scenario, the business receives a lump sum of cash from a lender and repays it with a percentage of credit or debit card sales until the advance is paid in full.

Recommended: Guarantor vs. Cosigner: What Are the Differences?

Example of a Short-Term Loan

A bank overdraft can be considered a short-term loan the bank provides when your account balance isn’t sufficient to pay for a purchase you’ve made. In this scenario, your account lacks funds to make a payment, but the bank lends you that money. In return, you pay a fee.

How Long Is a Short-Term Loan?

Every loan varies based on the lender and applicant. Often, short-term loans mature within a year or less. However, it is possible to find a short loan term that extends up to two years. Any loan term longer than that qualifies as either a medium-term or long-term personal loan.

Characteristics of Short-Term Loans

Short-term loans have unique features, such as:

•   Smaller borrowing amounts compared to other loans.

•   Typically offered as unsecured loans.

•   High annual percentage rates (APRs).

•   Short repayment periods.

•   Sometimes weekly payments are required.

Benefits of a Short-Term Loan

Short-term loans come with certain disadvantages, mostly due to their high interest rates. But they can be helpful if you find yourself in a tight spot. Some benefits include:

High Approval Rates

Since short-term loans only provide limited funds, the lending requirements may be easier to meet. Because of that, more applicants have a chance of approval. Even though you may not need a stellar credit score, you could still have some trouble if you have a low credit score. Your lender may ask for proof of a steady income, among other criteria.

Online Application

Short-term loans are also easy to access. Lenders often offer online applications, so there’s no need to visit a brick-and-mortar office. Applications are typically easy to fill out, taking only minutes to complete.

Quick Access to Funds

The short-term loan processing time is usually fast. As a result, you will probably receive approval and loan proceeds faster than you would for a long-term loan. They might be a good option if you have an unexpected expense you need to pay as soon as possible.

Lower Accrued Interest

While short-term loans can come with high interest, they generally have a short time frame. Because of that, there are fewer total interest payments. As long as you pay on time, you could save money on built-up interest with a short-term loan.

Lower Credit Score Requirements

As mentioned above, you don’t typically have to have an excellent credit score to get approved for a short-term loan. Applicants with average credit scores may also be able to usually qualify for a short-term personal loan.

No Collateral

When it comes to the difference between a secured vs. unsecured loan, a secured loan means more risk on the borrower’s part. That’s because a secured loan requires collateral, such as your car or your home. But most lenders don’t require collateral for a short-term personal loan because it doesn’t carry enough risk.

Disadvantages of a Short-Term Personal Loan

While short-term loans are easier to qualify for, they may not be the right choice for everyone. Here are some drawbacks to be aware of:

Lower Limit

For borrowers who need a significant amount of money, a short-term personal loan may not be the right choice. The borrowing limits for these types of loans tend to be small, sometimes just a few hundred dollars, to make it easier to pay off in a short amount of time.

May Lead to a Cycle of Debt

Because of the high-interest rate and steep fees attached to short-term loans, they really aren’t long-term solutions. They might be an option in an emergency but can lead to a cycle of debt if relied on too often.

Types of Short-Term Loans

There are a few variations on the short-term loan available to you. The type of personal loan you apply for will generally depend on the amount of cash you want and how quickly you need it. Here are some worth considering:

Payday Loans

A payday loan is a short-term loan that some people use to tide themselves over financially until their next paycheck. The funds are meant to be repaid at the time of the borrower’s next payday — thus, the name. However, payday loan issues arise if the borrower can’t repay the loan in the short time frame required.

Installment Loans

Installment loans give borrowers a way to access a lump sum of money that’s repaid in monthly installments over a set time frame. A fixed-rate loan with steady monthly payments makes budgeting during the repayment period more convenient.

Lines of Credit

A line of credit is similar to a credit card. You receive a credit limit and can tap into the line of credit as needed. Funds can be taken out in installments of the amount needed at the time they’re needed. But you can’t surpass your limit, which the lender bases on your creditworthiness.

Merchant Cash Advance

Merchant cash advances are used by businesses that make mainly debit or credit card sales. As a means to secure cash, the business will borrow a lump sum, which is advanced against the business’s daily sales. The lender is then repaid through a certain percentage of the business’s daily sales.

Invoice Financing

Similar to merchant cash advances, invoice financing is a type of short-term loan that can help business owners meet financial needs. The business submits unpaid invoices, i.e., accounts receivable, to a lender as collateral. The lender charges a fee for the financing and can collect on the invoices if the borrower defaults.

Short-Term Loan vs Long-Term Loan

It’s always important to explore your options. Short-term loans probably aren’t the right option if you need a large amount of funds in a lump sum or will need to periodically draw small amounts from a set amount of credit. In these situations, a long-term loan might be a better solution.

Long-term personal loans can sometimes have high-interest rates depending on the applicant’s credit score and other factors used by the lender. They may not require collateral, which makes them seem risky to lenders.

Here’s a breakdown of how these two loans stack up against each other:

Typical Requirements to Get a Short-Term Loan

Requirements to be approved for a short-term loan vary by lender, but all lenders will evaluate your creditworthiness in some way. Generally, a higher credit score will likely secure you better terms and interest rates. You also need to be able to show your lender a range of personal and financial information such as proof of identity, verification of employer and income, and proof of current address.

Can I Get a Short-Term Loan With Bad Credit?

While short-term loans don’t typically require excellent credit, the higher an applicant’s credit score, the better their chances of approval. A lender may also offer more favorable interest rates and terms to a borrower with a higher score. Since short-term loans are often for relatively small amounts of money, requirements tend to be more relaxed.

Personal Loan Options From SoFi

SoFi offers personal loan options to fit a variety of financial situations and needs. With competitive interest rates and a range of terms, there may be a SoFi personal loan that works for you. SoFi does not charge fees on personal loans, so you only repay the loan principal and interest. A personal loan calculator can help you compare loan options and figure out monthly payments.

The Takeaway

What is a short-term loan? It’s a small loan that’s designed to be repaid quickly, usually within 12 to 18 months. Short-term personal loans vary based on your financial situation and the lender you use. Some lending institutions use high-interest rates and hidden fees that can add to the overall cost of a short-term personal loan. That doesn’t make a personal loan bad, but it’s important to be aware of what you’re agreeing to when you borrow money.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

Photo credit: iStock/kitzcorner

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q424-064

Checking accounts are designed for everyday money management and make it easy to pay bills, either online or via debit card or check. Savings accounts, on the other hand, are set up for saving rather than spending. These accounts typically pay a higher interest rate on your balance to incentivize saving, and don’t provide the same ease of access as checking accounts.

That said, it’s possible to pay bills using your savings account. Whether or not you should, however, is another question. Here’s a look at when and how you might use your savings account to cover bills, whether it’s a one-off expense or a recurring payment.

How to Pay Bills From Your Savings Account

Since savings accounts aren’t set up for covering regular expenses, they don’t come with checks or a debit card. However, there are some other ways to pay bills with a savings account. Here are some to consider:

Withdraw Cash

If you’re able to pay a bill in cash, you can withdraw it from your savings account at an ATM using your ATM card or, if you also have a checking account at that bank, your debit card. To avoid fees, be sure you use an ATM that’s in your bank’s network. Also keep in mind that banks typically allow a maximum of $500 to $1,000 to be withdrawn at an ATM per day. You can withdraw more cash by going to a teller to make the withdrawal.

Make a Transfer

A simple way to use your savings account to pay a bill is to transfer the needed amount into your checking account, then make the payment from there. You can typically make this kind of transfer by using your banking app, logging into your account online, or visiting a local branch.

If your checking and savings accounts are at the same bank, the transfer is usually immediate. If your savings account is at a different financial institution than your checking account, it may take up to three days to post.

Recommended: How to Transfer Money From One Bank to Another

Use Bill Pay

In some cases. you may be able to set up a direct recurring payment from your savings account to a company or service provider, such as your credit card issuer or utility company. To do this, you’ll need to supply the billing company with the routing and account number for your savings account. Once the account is authorized, that company can then debit funds from your savings account.

Keep in mind, however, that some billing companies do not allow automatic debits to come from savings accounts. Plus, some financial institutions don’t permit this type of transaction.

Get a Cashier’s Check

For a large, one-time bill, you might consider using a cashier’s checks. This type of check looks and works like a typical check, except it’s written by a bank or credit union for withdrawal from the institution’s account, instead of the customer’s personal funds. Because the financial institution guarantees the check, it’s considered a highly secure form of payment.

To use a cashier’s check to pay a bill with a savings account, you’ll need to visit your bank or credit union and purchase the check using funds from your savings account. Financial institutions typically charge a fee for cashier’s checks.

Recommended: Money Order vs Cashier’s Check: What’s the Difference?

What Else Are Savings Accounts Used For?

Savings accounts work well for storing and growing funds you don’t need immediately but plan to use some time in the next few months or years.

Since these accounts keep your money safe and accessible, they are ideal for building your emergency fund. A general rule of thumb is to keep at least three to six months’ worth of living expenses parked in a separate savings account that earns a competitive return, such as a high-yield savings account. When an emergency or unexpected expense comes up, you can then easily access those funds and immediately have the cash you need to deal with the problem.

Savings accounts also work well for short-term savings goals, such as paying for a vacation, new car, or home improvement project. For longer-term goals like retirement or a child’s college education, however, you’re likely better off investing your funds in the market, which involves risk but can provide greater returns over the long term.

Tips for Getting the Most Out of Your Savings Account

These strategies can help you maximize the benefits of a savings account.

•   Select a high-yield or high-interest savings account. If your money is sitting in an account, earning as much interest on it as you can maximizes your cash.

•   Set some specific savings goals. Understanding why you want to save money, whether it’s for a home, a vacation, or an emergency fund, can help you stay motivated to stick to your savings plan.

•   Try to minimize withdrawals. To make sure your savings account grows, rather than shrinks, try to limit everyday spending to the money you have available in your checking account.

•   Automate savings. To reach your savings goals faster, consider setting up a recurring transfer from checking to savings for a set day each month, ideally right after your paycheck clears.

Consequences of Paying Bills With Your Savings Account

In the past, the Federal Reserve has limited the number of transfers or withdrawals from a savings account to six per statement period under a rule called Regulation D. In response to the coronavirus pandemic, however, the Federal Reserve Board lifted the six-per-month limit. While some banks and credit unions have since loosened restrictions, many have chosen to continue imposing transaction limits. Exceeding the limit can result in a fee or, if it happens repeatedly, conversion or closure of your account.

Even if your bank doesn’t limit savings account transactions, using a savings account to pay bills generally isn’t as easy or convenient as using a checking account. Moreover, using your savings account for bill payments can reduce your balance, impacting your ability to earn interest and save for future goals.

Alternative Ways to Pay Your Bills

If you prefer to keep your savings account strictly for saving. Here are some other ways you can pay your bills:
Check

•   Direct debit from your checking account

•   Online bill payment using your checking account

•   Money order

•   Cash (paid in person)

•   Credit card

The Takeaway

While it’s possible to pay bills from your savings account, it’s generally not the most practical or cost-effective. Savings accounts are designed for saving money and earning interest, making them better suited for short-term saving goals rather than daily expenses.

That said, there may be times when you need to tap your savings to make a payment. In those instances, withdrawing cash or transferring money to a checking account are generally the most convenient ways to spend the money in your savings account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What ways can you spend using your savings account?

You can spend money from your savings account by withdrawing cash at an ATM, transferring funds to your checking account (and spending them from there), getting a cashier’s check, and, if your bank allows it, through direct online payments.

Why is it difficult to pay bills with your savings account?

Savings accounts are primarily designed for storing funds and earning interest, not for frequent transactions. As a result, many banks impose restrictions and fees to discourage the use of savings accounts for regular bill payments and everyday spending.

Can you pay direct debit from a savings account?

It depends on your bank and who you are trying to pay. In some cases, it’s possible to set up a direct debit from a savings account to a payee. However, some billing companies only permit direct debits from checking accounts, and many banks block this type of transaction.

Even if you are able to set up autopay through your savings account, you’ll also want to keep in mind that banks often limit transactions from savings accounts to six per month. Automatic debits could cause you to exceed your limit, resulting in fees and, in extreme cases, closure of your account.

About the author

Sarah Li Cain

Sarah Li Cain, AFC is a finance and small business writer with over a decade of experience. Her work has been featured in numerous publications, including Kiplinger, Fortune, CNBC Select, U.S. News & World Report, and Redbook. Read full bio.

You may also be interested in:

Can You Spend Money From A Savings Account?

Can You Write Checks From a Savings Account?

How Much Should I Have in Savings?

Photo credit: iStock/PeopleImages

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK0223014

There’s no such thing as a good time to lose your job. Unfortunately, a layoff typically does not stop the influx of bills.

Luckily, individuals who find themselves in such a tough position have options. Before resorting to pulling out the big guns, like forbearance or other alternatives that can potentially hurt your credit, it’s worth taking a look at all of the choices on the table. That way, you’ll fully understand your options and their implications before making a move when you’ve lost your job and can’t pay your bills.

Assess Your Financial Situation

Whether you’ve lost your job or are in a precarious employment situation, getting your financial house in order is an important first step. Start by evaluating your current income and recurring expenses and looking for areas where you can cut back.

A good way to keep monthly spending in check is to create a budget, either on your own or with the help of a budget planner. If you’ve lost your job and your income has dropped, you’ll want to prioritize the essentials: food, utilities, housing, and transportation.

Explore Financial Assistance Options

Even with modified spending habits and a new budget, a loan due is a loan due — or at least a situation that won’t go away without dealing with it. Here are some options to consider.

Reaching for Lifelines

Even with modified spending habits and a new budget, a loan due is a loan due — or at least a situation that won’t go away without dealing with it. The reason you lost your job will form a fork in the road of sorts about how to proceed.

Unemployment Benefits

If you voluntarily quit without good cause, then unemployment benefits probably will not be available. But usually the first part of a survival plan for unemployment is to get into the system for unemployment, if possible. To get started, an unemployment benefits finder can help, as can exploring unemployment resources by state.

Hardship Loans

These types of personal loans are designed to help borrowers overcome a job loss or other financial difficulty. Whether they’re unsecured or secured, hardship loans for unemployed borrowers can provide much-needed funds during a difficult time. You may be approved within a couple of days and could receive the money in about a week or less.

Forbearance and Deferment Programs

Many lenders have forbearance and deferment programs in place for their customers, but it’s generally up to the customer to reach out and ask for help.

Forbearance — a pause in monthly payments toward a loan — is an option offered in many lending agreements. The terms vary, but it can open the door to a revised agreement that may allow for decreased or delayed payments for a specific period of time. Some lenders may even offer to reduce the interest rate charged on the debt.

On the surface, this sounds positive, but note that these options can significantly affect your credit scores. The impact depends on the type of loan and the lender. What’s more, interest will usually accrue and be added to your principal balance at the end of a forbearance period.

Communicate With Lenders

As we mentioned, it’s a good idea to contact your lenders as soon as possible if you’ve lost your job and are struggling to make your monthly payments. Discuss your situation with them, and explain how your job loss is impacting your ability to repay your debt.
Then explore options that may be available to you. Two strategies to consider:

•   Negotiate a reduced balance on the account. Most creditors would rather receive a partial payment than none at all. If you’re having a difficult time making ends meet, you may want to propose paying a lump sum for less than what you owe. If the lender agrees, be sure to get the arrangement in writing.

•   Ask about hardship programs. Depending on the lender, you may be offered relief measures like a lower interest rate, waived late fees and penalties, a temporary pause in payments, or lower minimum payments.

Explore Loan Modification or Refinancing

Instead of falling into potential debt traps like payday loans or credit cards with high interest rates, look for solutions that make monthly payments more affordable — without saddling you with hefty interest rates and fees. A loan modification or refinancing are two such options.

With a modification, a lender agrees to change your loan’s rate, repayment term, or both to an amount you can afford. For example, they may extend the number of years you have to pay back the loan, lower your interest rate, or reduce your principal balance. Keep in mind that lenders are under no obligation to offer loan modifications, and they’ll likely first require you to provide proof of financial hardship.

Another option is to explore refinancing opportunities. While it can be harder to qualify for refinancing when you don’t have a job, it is possible. Lenders like to see borrowers with a strong credit history and a good debt-to-income ratio. Asking a trusted friend or family member to be a cosigner may also help bolster your application.

As you weigh your choices, consider enlisting the help of a financial advisor or mortgage specialist who can help you find the solution that’s right for you.

Build an Emergency Fund

Losing a job can be stressful, but there are ways to prepare financially while you’re still employed. One effective strategy is to build an emergency fund.

There are several approaches you can use to help you establish a safety net, including:

•   Creating a budget — and sticking to it

•   Building a savings plan so you’re able to cover at least three to six months’ worth of unexpected expenses

•   Exploring high-yield savings accounts

•   Automating your savings contributions

•   Paying down debt

Seek Professional Guidance

If you’re struggling to pay off your loans after losing a job, you may think you have to figure out all the answers on your own. You don’t. Help is available.

•   Consult with a financial planner or credit counselor. These professionals can help you manage your finances after a job loss and get back on firmer financial ground once you land a new job.

•   Seek assistance from nonprofit organizations. Services vary by organization but may include resume building programs, education and training opportunities, and job placement programs.

•   Consider debt counseling or debt consolidation. With debt counseling, a professional will offer advice on your finances and debt, help you create a budget and debt management plan, and provide financial education. Debt consolidation is when you combine multiple debts into a single loan, ideally with a lower interest rate. However, it may lead to longer payment terms or involve fees.

The Takeaway

The main thing to remember for anyone who is out of work and still responsible for loans is: You are not alone. It might seem difficult, even impossible, but it is doable — and even the longest journeys begin with taking the first steps.
After you’ve started tracking your expenses, cutting back on costs, and reaching for lifelines through unemployment benefits and your lender, the next step in dealing with loan payments after a job loss is to explore your options. Rather than turning to potential debt traps like payday loans and credit cards, you might consider jobless loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q424-055

Loans have become an integral part of American financial life. We need a mortgage to buy our first home, and an auto loan to purchase a car. More recently, people are turning to personal loans to cover surprise bills and avoid high-interest credit card debt. But just because you need a loan doesn’t mean a lender is going to give you the loan — and interest rate — you want.

If you’re struggling to qualify for a loan, a friend or family member may be able to help by becoming a co-borrower. By leveraging their income, credit score, and financial history, you may qualify for better loan terms. Let’s dive into the details.

Understanding Co-Borrowers

As you’re considering your options, a natural first question may be, what is a co-borrower? Essentially, a loan co-borrower takes on the loan with you, and their name will be on the loan with yours. They will be equally responsible for paying the loan back and will have part ownership of whatever the loan buys. When you take out a mortgage with someone, the co-borrower will own half the home.

Spouses often co-borrow when buying property, and when taking out a personal loan for a home improvement or remodeling project. In other circumstances, two parties become co-borrowers in order to qualify for a larger loan or better loan terms than if they were to take out a loan solo.

Having a co-borrower can help two people who both want to achieve a financial goal — like first-time homeownership or buying a new car — put in a stronger application than they might have on their own. The lender will have double the financial history to consider, and two borrowers to rely on when it comes to repayment. Therefore, the loan is a less risky prospect, which may translate to more favorable terms.

Recommended: All About Variable Interest Rate Loans

Qualifying as a Co-Borrower

If you’re planning to have a co-borrower on your personal loan application, it helps to understand what criteria you both must meet in order to be accepted by the lender. Let’s take a closer look at common factors lenders consider.

Credit Score

A credit score can have a significant impact on whether your loan application is approved and what terms you’re offered. There’s no magic number, but generally speaking, lenders prefer to see a score of 670 or higher. You and your co-borrower may want to check your credit scores for free before you apply.

Proof of Income and Employment

To help them determine whether co-borrowers can afford loan payments, a lender will likely want to see proof of a stable income and employment. You both may be asked to provide recent pay stubs, tax returns, and bank statements. You might also be asked to show a letter from your employers verifying your employment status, how long you’ve both been employed, and your salaries.

Debt-to-Income Ratio

Debt-to-income ratio, or DTI ratio, is a comparison of your monthly debts to your gross monthly income (before taxes). Lenders use this information to help determine how risky it would be to loan money to a borrower. It can affect your ability to borrow money and the interest rate you’ll receive. Generally, lenders like to see a DTI that’s no higher than 36%, though there may be some wiggle room.

In addition to the above, lenders also usually consider:

•   Financial history. This includes recent bankruptcies, judgments, and liens.

•   Age. Many lenders have a minimum age for co-borrowers, typically 21 to 25 years of age.

•   Citizenship. Co-borrowers generally must be either citizens or permanent residents of the U.S.

Co-Borrower Process

Applying for a loan with a co-borrower? The application process is fairly similar to the one you’d follow if you were applying alone.

A good first step is to reach out to your lender and start the prequalification process. If your co-borrower has a strong credit profile, that could improve your odds of qualifying for better rates and terms.

Next, you and your co-borrower will need to complete the loan application. You’ll also both undergo credit checks, and the lender will evaluate your finances. You may be asked to provide documentation like pay stubs, bank statements, or tax forms.

Within a few days or so, you’ll find out if you’re approved and what your loan terms are. Once you agree to the terms, your loan funds will be disbursed, usually within a week. Your lender will also share details about how to make monthly payments.

Co-Borrower vs. Cosigner

A cosigner plays a slightly different role than a co-borrower. A cosigner’s income and financial history are still factored into the loan decision, and their positive credit standing benefits the primary applicant’s loan application. But a cosigner does not share ownership of any property the loan is used to purchase. And a cosigner will help make loan payments only if the primary borrower is unable to make them.

Cosigning helps assure lenders that someone will pay back the loan. Typically, a cosigner has a stronger financial history than the primary borrower. This can help someone get approved for a loan they might not qualify for on their own, or secure better terms.

No matter which route you choose, there are potential credit implications to keep in mind. For example, when you apply for a loan, the lender will likely do a hard credit pull. This may cause credit scores to temporarily dip for you and your cosigner or co-borrower.

Both parties may also see a drop in their credit score if monthly payments are late or missed altogether. (And remember, cosigners will be on the hook for making loan payments if the main account holder can’t.) On the flip side, on-time payments can help boost or build credit scores.

When should you choose a cosigner vs. a co-borrower? The answer depends on your situation and goals. If you intend on sharing ownership of whatever you buy with the loan, then a co-borrower may be a good choice. If you simply need someone with a strong credit history to bolster your loan application, then consider using a cosigner.

Recommended: What Is Revolving Credit?

The Takeaway

Taking out a loan is a big decision, and doing so with a co-borrower carries additional risks. A co-borrower is a partner in the loan and any property the loan is used to purchase. If one borrower cannot make their payments, the co-borrower will be on the hook for the full amount. But if both parties can come to an agreement about how they’ll handle any financial hardships, co-borrowing can have major benefits. By pooling their income and debt, they may lower their debt-to-income ratio and qualify for a mortgage or personal loan with a lower interest rate and better terms.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

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