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

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When you’re applying for a loan, you might have the option to add a cosigner or co-borrower. One of the biggest differences between a co-borrower and cosigner 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 cosigner, 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.

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What are the differences between a cosigner and a co-borrower?

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

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

Cosigners

A cosigner agrees to take responsibility for repaying a loan if the primary borrower misses a payment. The cosigner 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 cosigner.

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.

Cosigners typically have a close relationship with the primary borrower. A cosigner is typically a parent, immediate family member or spouse.

How it works

A cosigner is a guarantor for the primary borrower. cosigners promise to assume responsibility for repayment if the primary borrower doesn’t pay as required; otherwise, payments are the responsibility of the primary borrower.

Risks of cosigners

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

Who a cosigner is best for

cosigning 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. It may make sense for a spouse with a low income or a student without credit.

Co-borrowers

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.

Risks of cosigners

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.

Who a cosigner is best for

cosigning 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.

How do you choose between being a co-borrower or cosigner?

If you have a choice between cosigning and co-borrowing, the right approach depends on what your goals are for the loan. Here’s what you should consider with each option.

Cosigners

With a cosigner, you won’t have to put up collateral or accept responsibility for regular payments. Also, if you make on-time payments as the primary borrower, you may boost your credit score.

On the flip side, if you default, the cosigner will be on the hook for payments. Plus, they won’t be able to use the loan funds and might have difficulty getting approved for other loans.

Co-borrowers

If you go with a co-borrower, they’ll benefit from the loan directly. You may also qualify for lower rates and higher amounts, especially if you both have good credit.

The downfall, however, is that you have a shared responsibility for making payments. Additionally, you may need collateral and notice a dip in your credit score as a result of late payments.

What should I do before co-borrowing or cosigning?

Before co-borrowing or cosigning 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 cosigner rights in your state. It might have its own set of protections around property ownership and how credit is impacted.

Bottom line

Now that you understand a co-borrower vs. cosigner, ask yourself the following questions before you go one way or the other:

  • Can you afford to make payments toward the loan?
  • How stable is your source of income?
  • How will cosigning 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, cosigning might be right for you.

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