Borrowing money is complicated, especially if you aren’t getting a loan on your own. Sometimes, multiple borrowers want to get a loan together and share responsibility for repayment. For example, if spouses take out a mortgage together, they can apply to be co-borrowers on the loan.
In other cases, one person wants a loan but needs help qualifying from someone with better credit or a higher income. The person who helps out is known as a cosigner.
There are big differences between a cosigner versus a co-borrower, and each option has its own pros and cons. Below, learn about the distinctions between them and find out which choice is best for your situation.
Cosigner vs. co-borrower: What’s the difference?
Cosigners and co-borrowers both assume legal responsibility for repaying a loan. But they do so for different reasons and with different expectations.
A co-borrower applies for a loan with the primary applicant, and both parties are responsible for paying back the loan. Lenders will evaluate a co-borrower’s credit history, income, and assets during the loan application process. Co-borrowers are also required to sign all loan documents and be listed on the title if the loan is going toward property, such as a home or car.
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 they’ll each be making payments. If there’s property involved — if the loan is used for a home mortgage down payment or a car, for instance — the co-borrowers have a shared interest in the property.
Applying for a loan with a co-borrower reassures the lender that multiple sources of income can go toward repayment. Applicants with co-borrowers are more likely to receive larger loan amounts, as they represent less risk to the lender.
A cosigner, on the other hand, is “a guarantor, without whom the loan will not be approved,” said Ogechi Igbokwe, a financial educator and founder of OneSavvyDollar. “A cosigner guarantees that the loan will be repaid.”
The cosigner doesn’t intend to make any payments — that’s the primary borrower’s job. But they do promise to assume responsibility for repayment if the primary borrower doesn’t pay as required. In the case of FHA loans, the cosigner doesn’t hold any ownership in the property. Loan applicants typically use a cosigner in situations where they wouldn’t otherwise be approved due to their lower credit score or short credit history.
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 cosign even though they don’t need the loan, with the understanding that their child will pay it back.
To put it simply, the biggest difference between a co-borrower and cosigner is the degree of investment in the loan. While both co-borrowers and cosigners are legally connected to the loan, a co-borrower has more responsibility (and ownership) than a cosigner. But both cosigners and co-borrowers are still on the hook to pay the loan back if the primary applicant doesn’t.
What situations are best for a cosigner vs. a co-borrower?
There are many situations where it makes sense to have a cosigner or co-borrower. Adding a cosigner or co-borrower to your application, for example, could help you qualify for a loan or earn a lower interest rate.
In some cases, cosigning is the only option. Students often need cosigners to qualify for private student loans, for instance, since young people often don’t have the credit to qualify on their own.
However, a student who takes out a private loan is typically the primary borrower and has a cosigner who guarantees the loan. Most lenders don’t offer joint applications for co-borrowers to take out a student loan together.
In other cases, borrowers can choose whether to get a cosigner or co-borrower. If a husband and wife buy a car together, they could get a joint loan and be co-borrowers who own and pay off the car together.
Alternatively, a husband could buy a car in his name only but have his spouse cosign the loan. He might choose to do this if his income isn’t high enough to qualify alone.
When you’re given a choice, co-borrowing is often better in situations where both parties want to have rights to a property and contribute to repayment. Cosigning is typically preferable if only one of the borrowers will have rights to the property and is expected to make payments on their own.
Pros and cons of cosigning vs. co-borrowing
If you have a choice between cosigning and co-borrowing, the right approach depends on what your goals are for the loan.
Co-borrowers benefit by jointly owning assets, whereas cosigners don’t typically use the car, house, or education they cosign for.
The fact that co-borrowers directly benefit from the loan is a big pro, especially if jointly applying makes it possible to start a business, buy a shared home, or purchase a car. But co-borrowers work together to repay the debt, whereas cosigners don’t have to pay any money unless the primary borrower fails to fulfill their obligation.
Of course, everything doesn’t always go according to plan. That’s why co-borrowing and cosigning are both risky.
“If you’re considering cosigning on a loan or co-borrowing with someone, be aware that both scenarios will require you to take on the full financial burden if the other party can’t,” explained Misty Lynch, a certified financial planner and financial consultant with John Hancock. “Situations change over time and some people who initially have every intention of paying their loans back on their own can’t do it.”
Agreeing to be a cosigner or co-borrower could also impact your credit. In both scenarios, a missed payment will negatively influence your credit score. The loan will also appear on your credit report, which could increase your debt-to-income ratio. Both of these things could make it harder for you to get a loan in the future.
If you know the risks and want to borrow money with someone to accomplish a goal, co-borrowing might make sense. Alternatively, if you want to help out a loved one by guaranteeing a loan, cosigning might be right for you.