Additional borrowers: Overview, definition, and example
What are additional borrowers?
Additional borrowers refer to individuals, entities, or parties who are added to an existing loan agreement after the initial agreement has been made. These borrowers are typically added with the consent of the original lender and the existing borrowers. When additional borrowers are included in a loan, they assume responsibility for repaying the loan along with the original borrower(s). The addition of borrowers to the loan agreement can occur for various reasons, such as the need to strengthen the borrower’s creditworthiness, secure additional funding, or share the financial responsibility for the debt.
Why are additional borrowers important?
Additional borrowers are important because they can help increase the likelihood of loan approval or improve the financial strength of the loan agreement. By adding borrowers with stronger credit histories, higher incomes, or greater assets, the loan’s risk is reduced, making it more likely that the lender will approve the loan. Additionally, adding borrowers can help distribute the responsibility for repaying the debt across multiple parties, reducing the burden on any single borrower. This is often used in personal loans, mortgages, business loans, or credit facilities when multiple parties are involved in managing the debt.
Understanding additional borrowers through an example
For example, a couple applies for a mortgage loan to purchase a home. Initially, only one person in the couple has the income and credit score to qualify for the loan. However, the lender suggests adding the other partner as an additional borrower, as their combined income and credit history will improve the likelihood of loan approval. Both individuals now share responsibility for repaying the loan, and their creditworthiness is jointly considered by the lender.
In another example, a small business applies for a loan to expand its operations. The business owner initially applies for the loan but is advised by the lender to add a partner as an additional borrower, as the partner's assets and financial stability will strengthen the loan application. This ensures that both the business owner and the partner are equally responsible for repaying the loan if it is approved.
An example of an additional borrowers clause
Here’s how an additional borrowers clause might appear in a loan agreement:
“The Borrower may, with the prior written consent of the Lender, add additional borrowers to this Agreement. The Additional Borrowers shall assume all the obligations and responsibilities of the Borrower under this Agreement, including the full repayment of the loan, and shall be jointly and severally liable for the debt. The Lender reserves the right to assess the creditworthiness of any Additional Borrower before approving their inclusion.”
Conclusion
Additional borrowers are a key feature in loan agreements where multiple parties are involved in repaying the debt. By adding individuals or entities with strong financial backgrounds or assets, borrowers can increase their chances of securing a loan, reduce individual risk, and share the financial responsibility of repayment. Whether for personal or business loans, the inclusion of additional borrowers helps ensure that the debt is more likely to be repaid in full, benefiting both the lender and the borrower(s).
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.