Co-borrower vs. co-signer: What’s the difference?

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When you’re applying for a loan, you might have the option to add a co-signer or co-borrower. One of the biggest differences between a co-borrower and co-signer is that a co-borrower shares ownership of the asset that’s tied to the loan and assumes the responsibility of payments from the start. A co-signer, on the other hand, doesn’t own the collateral that’s associated with the loan and is only liable for the loan if the primary borrower doesn’t make their payments.

Keep reading to learn more about the distinctions between these two roles and find out which choice is best for your situation.

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Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

What is a co-borrower?

A co-borrower, sometimes called a co-applicant, is a person who shares liability for repaying a loan with another person. Applying for a loan with a co-borrower reassures the lender that multiple sources of income can go toward repayment.

For example, if two people start a business together, they might take out a personal loan as co-borrowers and work on paying it back together. Both directly benefit from borrowing and enter the transaction knowing that they’ll each be making payments.

Applicants with co-borrowers are more likely to receive larger loan amounts, as they represent less risk to lenders.

How it works

In addition to both parties being responsible for making payments toward the loan, assets that guarantee the loan — like a home or car — may be owned by both co-borrowers.

If spouses take out an FHA mortgage together, for example, they can apply to be co-borrowers on the loan. Each person is named on the mortgage note obligating them to pay the loan, they both must sign the security instrument (mortgage deed) and they both have ownership of the property once the loan is fully paid.

Who a co-borrower is best for

There are many situations where it makes sense to have a co-borrower. Agreeing to co-borrow a loan is generally advantageous when both co-borrowers benefit directly from the loan and want to contribute to repayment. This situation might occur when spouses co-borrow on a joint loan for a shared car that both will use and pay off together.

It can also be mutually beneficial for business partners who need to borrow money for a joint enterprise while maintaining a shared liability for the debt.

Risks for co-borrowers

The biggest risk for co-borrowing on a loan is that each co-borrower is responsible for repayment from the start. Any actions by either co-borrower that impact the loan will have a ripple effect on the other borrower.

For example, if a co-borrower faces financial hardship and decides to file for bankruptcy, the other borrower can be adversely affected. This includes their credit, potential collection efforts, and even loss of the asset that secures the loan (like a car).

If the relationship between borrowers is strained after a co-borrowing agreement is made, separating an investment or asset can also complicate matters.

What is a co-signer?

A co-signer agrees to take responsibility for repaying a loan if the primary borrower misses a payment. The co-signer typically has better credit or a higher income than the primary borrower, who might otherwise not get a loan application approved without the help of a co-signer.

If a young person without established credit wants a personal loan to start a business, for example, the bank might decide that granting the loan is too risky unless someone with better credit agrees to share legal responsibility for repayment. A parent with good credit might agree to co-sign even though they don’t need the loan, with the understanding that their child will pay it back.

Co-signers typically have a close relationship with the primary borrower. A co-signer is typically a parent, immediate family member or spouse.

How it works

A co-signer is a guarantor for the primary borrower. Co-signers promise to assume responsibility for repayment if the primary borrower doesn’t pay as required; otherwise, payments are the responsibility of the primary borrower.

As a co-signer, you’ll have your income and credit evaluated by the lender before a loan decision is made to ensure that you have a positive payment history and the means to repay the loan if necessary. You’re also named on the loan promissory note and required to sign it. However, you don’t benefit financially from the loan.

Who a co-signer is best for

Co-signing is typically preferable if only one of the borrowers will benefit from the loan and the primary borrower agrees to make payments on their own. For example, if a spouse has a low income but wants to buy a car in their name only, they may have a better chance of being approved if their spouse with good credit and higher income co-signs the loan.

Students also often need co-signers to qualify for private student loans, since young people often don’t have the credit to qualify on their own.

Risks for co-signers

Like co-borrowers, co-signers take on financial risk. Co-signers are responsible by law for paying outstanding debt that the primary borrower fails to pay.

If the primary borrower files for Chapter 7 bankruptcy, for example, creditors can pursue the co-signer to collect on the debt instead. Not only are co-signers targets for collection, but their good credit can be negatively affected by a default. This path can also hinder the co-signer from accessing their own new lines of credit or loans.

What is the difference between a co-borrower vs. co-signer?

To put it simply, the biggest difference between a co-borrower and a co-signer is the degree of investment in the loan.

A co-borrower has more responsibility (and ownership) than a co-signer, since a co-borrower’s name is on the loan and they are expected to make payments.

What are the similarities between a co-borrower vs. co-signer?

Co-signers and co-borrowers both assume legal connection and responsibility for repaying a loan.

Including a co-signer or co-borrower might also positively impact loan application decisions. A second person — with strong credit and reliable income — who’s financially liable for the loan reduces the lender’s risk of being left unpaid.

Both co-signers and co-borrowers are still on the hook to pay the loan back if the primary applicant doesn’t.

Whether there’s a co-borrowing or co-signing arrangement, a relationship can be strained when finances are concerned if one or both people don’t uphold their ends of the agreement.

Pros and cons of co-borrowing vs. co-signing

If you have a choice between co-signing and co-borrowing, the right approach depends on what your goals are for the loan.

Pros and cons of co-borrowing

Pros:

  • Benefit directly from the loan.
  • Qualify for low rates if both borrowers have good credit.
  • Potentially higher loan amounts.

Cons:

  • Shared responsibility for making payments.
  • Credit score is impacted by late payments.
  • Collateral may be required.

Pros and cons of co-signing

Pros:

  • No collateral required.
  • No responsibility for regular payments.
  • Potential credit score boost if the primary borrower makes on-time payments.

Cons:

  • Liable for payments if the primary borrower defaults.
  • Cannot benefit from loan funds.
  • Ability to apply for other loans may be affected.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

What should I do before co-borrowing or co-signing?

Before co-borrowing or co-signing a loan application, have a candid conversation with the other borrowing party. Together, determine whether the loan is even necessary, consider what alternatives there are and discuss each person’s financial picture and future goals.

It’s also useful to research the co-borrower and co-signer rights in your state. It might have its own set of protections around property ownership and how credit is impacted.

Next steps

If you’re thinking about co-borrowing or co-signing a loan, ask yourself the following questions:

  • Can you afford to make payments toward the loan?
  • How stable is your source of income?
  • How will co-signing or co-borrowing affect your own future life goals?
  • What are the financial habits of the co-applicant or primary borrower?

If you know the risks and want to borrow money with someone to accomplish a common goal, co-borrowing might make sense. Alternatively, if you want to help out a loved one by guaranteeing a loan, co-signing might be right for you.

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Written by
Jennifer Calonia
Contributing writer
Jennifer Calonia is an L.A.-based writer and editor. She's covered topics like debt, saving money and credit cards. You can find her work on Business Insider, Forbes and more.
Edited by
Associate loans editor