Co-signing and co-owning a car are two different ways to approach applying for a car loan with an additional borrower. In both cases, the secondary borrower needs to have sufficient credit and income to support the loan on their own. But each has benefits and drawbacks, depending on what both parties are looking for.

The differences between a co-signing and a co-owning a car

A co-signer is a person who is equally responsible for paying off the loan, but doesn’t have any legal ownership of the vehicle. A co-owner has equal claim towards it.

Co-signing for a car loan

In the case of a car, the co-signer agrees to take on the monthly repayments if the borrower can’t make them. This is a big decision to make and will affect the co-signer’s credit.

Benefits of co-signing on a car loan

  • Help qualifying: A co-signer can help a primary borrower qualify for a car loan they otherwise wouldn’t be qualified for.
  • Build credit: If the primary borrower can stay on top of payments, the credit of both the primary borrower and co-signer can be positively affected.
  • Reduce costs: If the co-signer has a very good to excellent credit score, the primary borrower can qualify for a lower interest rate and fees.

Risks of co-signing on a car loan

  • Responsibility for payments: If the borrower defaults, the co-signer is responsible for all loan repayments.
  • No legal claim: The co-signer is not on the title and has no legal claim to the car.

Co-owning a car

In the case of a car, both the owner and the co-owner are listed on the title. Having a co-owner doesn’t change the fact that the primary borrower owns the property. Depending on how the car is titled, the primary borrower may need permission before they can sell the car.

Benefits of co-owning a car

  • Safety for co-owner: The co-borrower has the safety of having their name on the title.
  • Better terms: If both borrowers have strong credit, the primary borrower may be extended better terms than if they applied alone.

Risks of co-owning a car

  • Equal rights: The co-borrower has equal rights to the car as the primary borrower. This means the co-owner must be involved in the sale or transfer of the car.
  • Insurance: Even if the co-owner doesn’t use the car, they will likely need to be on the insurance policy. This can mean higher costs for both involved.

How to choose between co-signing and co-owning a car

The main difference between co-borrowers and co-signers is the level of investment in the loan.

Co-borrowers have more responsibility and ownership than co-signers. Co-borrowing is best for people who both have good credit and want equal rights to the vehicle — such as a couple that wants to buy a car together.

On the other hand, a co-signer is best for a borrower who wouldn’t qualify for the loan at all, or needs help qualifying for a larger amount or lower interest rate.

How to prepare to co-sign or co-own a car

To be a co-signer on a loan, you’ll need to have a stable income and meet the credit score requirement set by the lender. The same is required for being a co-owner, because the credit of both borrowers is being considered.

Even if you meet the requirements, an open conversation should be had between the two parties. Co-signing and co-owning both come with significant credit risk. Make sure there is a plan in place in case the primary borrower can’t pay.

The bottom line

There are many reasons why you may choose to co-sign or co-own a car with another person. In either case, it is important that both parties are on the same page about what the relationship entails and what is expected from both of you.

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