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 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.

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 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 the lender.

How it works

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

What is a co-signer?

In some cases, one person might want a loan but doesn’t meet the lender’s credit or income requirements to get approved. In this scenario, the primary borrower might need to add someone with better credit or a higher income to the loan application. The person who helps out is known as 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. Co-signers are 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, your income and credit are evaluated by the lender before a loan decision is made to ensure that you have a positive payment history and have 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.

What is the difference between a co-borrower and a co-signer?

Co-signers and co-borrowers both assume legal responsibility for repaying a loan. But they do so for different reasons and with different expectations.

To put it simply, the biggest difference between a co-borrower and a co-signer is the degree of investment in the loan. Although both co-borrowers and co-signers are legally connected to 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. But both co-signers and co-borrowers are still on the hook to pay the loan back if the primary applicant doesn’t.

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.

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.

Featured image by ASDF_MEDIA of Shutterstock.

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