Cosigning vs. co-owning a car: What’s the difference?

Cosigning and co-owning a car are two different ways to approach applying for a car loan with an additional borrower. In both cases, the second borrower needs to have sufficient credit and income to support the loan on their own.

The primary benefit to co-owning is that both parties share equal access to the vehicle. Cosigning is not offered by many lenders, and for the cosigner, it presents a lot of risk with little reward. Consider the benefits and drawbacks of each option for your situation to determine which will better suit your finances and lifestyle.

Cosigning vs. co-owning a car

When you cosign a car loan, you’re essentially promising to cover the monthly payments if the primary borrower can’t. You won’t hold any legal rights over the car. With co-ownership, both the owner and the co-owner are named on the title, giving them equal rights and obligations on the vehicle and the loan.

Cosigning for a car loan

Best for: Situations where an individual needs assistance in securing a loan, perhaps due to lack of a credit history or a low credit score.

Cosigning for a car loan can aid the primary borrower in securing a car loan and potentially lower expenses with a better interest rate than a bad credit auto loan, provided the cosigner has a solid credit score. However, the cosigner is liable for payments if the primary borrower fails to pay. They also have no legal ownership over the car.

Benefits of cosigning a car loan

• Helps you qualify: A cosigner can help a primary borrower qualify for a car loan they otherwise wouldn’t be qualified for.
• Builds credit: If the primary borrower can stay on top of payments, the credit of both the primary borrower and the cosigner can be positively affected.
• Reduces costs: If the cosigner has a very good to excellent credit score, the primary borrower can qualify for a lower interest rate and fees.

Risks of cosigning a car loan

• Responsibility for payments: If the borrower defaults, the cosigner is responsible for all loan repayments.
• No legal claim: The cosigner is not on the title and has no legal claim to the car.
• Possible credit score damage: A single missed payment can also harm the cosigner’s credit score, even without default.

Co-owning a car

Best for: If both parties plan to use the vehicle and want to share the financial responsibility.

One benefit of having two names on the car title is more favorable loan terms if both parties have a good credit score. However, it also gives equal access to the car and potentially elevated insurance charges. Both individuals must agree to sell or transfer ownership.

Pros

• Safety for the co-owner: The co-borrower has the legal protection 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.
• Both parties can contribute: It might make more sense to split the down payment 50-50 or share in car payments. when both borrowers own the car.

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.
• Higher insurance costs: 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 parties.
• Ownership disputes: If the relationship ends, it may take a court to decide who gets the vehicle when both people have ownership.

How to choose between cosigning vs. co-owning a car

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

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

On the other hand, a cosigner 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 does a co-borrower or a cosigner affect your credit score?

Both cosigning and co-owning a car can have significant impacts on your credit score. For cosigners, if the primary borrower is diligent in making timely payments, it can boost the cosigner’s credit score. However, if the primary borrower defaults and the cosigner doesn’t step in to pay, the cosigner is held responsible, and their credit score may suffer.

Co-owners, on the other hand, are equally responsible for the loan from the start. If payments are made on time, both parties’ credit scores can improve. But if one party fails to pay, both parties’ credit scores will drop.

How to prepare to cosign or co-own a car

To be a cosigner 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.

Before deciding to cosign or share ownership of a car, have a frank discussion about your and the primary borrower’s financial stability. You should both discuss and understand the legal and financial implications of your commitment. Make plans in case the primary borrower can’t make payments.

Make sure you understand what you’re getting into by reviewing and keeping a copy of the loan details. To avoid being blindsided by missed payments, ensure you’ll receive regular updates on the loan status and regularly check your credit report. And if you decide to part ways with your co-borrower or cosigner, you can remove them from the title by refinancing your car loan.

Bottom line

Cosigning and co-owning can come with a number of benefits, such as the possibility of better loan terms, certain legal protections and improved credit. However, cosigners do not have their name on the title, while co-owners do. 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.