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

When you apply for a loan, you might have the option to add a co-signer or co-borrower. And while the terms are similar, a co-borrower — or joint applicant — shares ownership of the loan and assumes responsibility for payments from the start.

On the other hand, a co-signer is only liable for the loan if the primary borrower fails to make payments.

Quite a few lenders will allow co-borrowers on a loan, but co-signers are much rarer. When you apply, confirm with your lender and the other person on the loan which term applies best to avoid confusion down the road.

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

The most important 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 because a co-borrower’s name is on the loan, and they are expected to make payments. A co-signer only backs your loan and will not need to make payments unless you are unable to.

Co-signers

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.

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.

Pros of a co-signer

Adding a co-signer to a loan application could improve a borrower’s chances of qualifying and securing a lower rate. Plus, if the loan is repaid on time, it can improve both parties’ credit scores.

Risks of co-signers

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

Who a co-signer is best for

Co-signing is typically preferable if only one of the borrowers will benefit from the loan. For example, if a young person without established credit wants a personal loan, the bank might decide that 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 with the understanding that their child will pay it back.

Co-borrowers

A co-borrower, sometimes called a co-applicant or joint applicant, is a person who shares responsibility for repaying a loan with another person — and who has access to the loan funds. 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 since they are viewed as less risky for 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. Each co-borrower has equal access to the loan funds. And if the loan was used to secure property — like a vehicle — both co-borrowers will be listed on the vehicle’s title.

Pros of a co-borrower

Similar to adding a co-signer, adding a co-borrower could help a consumer secure a lower interest rate. In addition, depending on the co-borrower’s income, it might also help them qualify for a higher loan amount.

Risks of 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.

Who a co-borrower is best for

Co-borrowing is typically preferable if both borrowers will benefit from the loan. 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.

How to choose between a co-signer or co-borrower

The right approach depends on what your goals are for the loan. Consider these factors when choosing between a co-signer and a co-borrower.

Co-signers

A co-signer won’t have to put up collateral or accept responsibility for regular payments. Also, if the primary borrower makes on-time payments, the co-signer will never have to worry about the loan — and may still benefit from an improved credit score. .

On the flip side, if the primary borrower defaults, the co-signer 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 since it still counts toward their total debt-to-income ratio (DTI).

Co-borrowers

A co-borrower benefits from the loan directly. Lenders may also offer lower rates and higher loan amounts, especially if both borrowers have good credit. And since each borrower has equal responsibility, you may not need to provide additional collateral to secure the loan.

What should I do before co-borrowing or cosigning?

Before co-borrowing or cosigning a loan application, have an open conversation with the other person. Determine if the loan is necessary, consider what alternatives there are and discuss each person’s financial picture and future goals.

Because both options have considerable financial risk, you should consider a contract that outlines how responsibility will be split and what happens in worst-case financial situations. It is also useful to research your state’s co-borrower and co-signer rights. There may be protections around property ownership and how credit is impacted.

Bottom line

Ask yourself a few questions before applying for a loan with someone else:

• 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 future goals?
• What are the financial habits of the co-applicant or primary borrower?

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