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In general, borrowers are required to meet strict income and credit criteria to obtain a loan. Many struggle to meet these requirements without some help, due to poor credit or other financial setbacks.
There are two primary methods to help someone else get a loan: co-signing and co-borrowing. “Both co-signers and co-borrowers are legally obligated to make the loan payments if the other person fails to do so and can be sued by the lender if the other person fails to make payments,” explains Jesse Little, senior director of advice, at Wells Fargo Wealth and Investment Management in Palm Beach, Fla. It’s also important to note that both the co-signer and co-borrower can sustain damage to their credit history if the other borrower is late in making payments or misses payments entirely, Little says.
Though both co-borrowers and co-signers are ultimately liable for the loans, there are significant differences between them, differences to consider before stepping up to help a borrower qualify for financing.
What is a co-borrower?
The one main difference that distinguishes a co-borrower: The person with that designation is usually listed on the title to the property bought with the loan money, such as a car or a house.
The co-borrower, or joint applicant, applies for the loan with the primary borrower. “The co-borrower would sign the loan papers and assume responsibility for repaying the loan,” Little adds. Oftentimes, co-borrowers are spouses who desire a larger loan than either party could qualify for individually. This allows a lender to consider the financial information from both parties to determine whether or not to approve a loan.
Having a co-borrower
Pros
More borrowing power. A co-borrower’s employment history, credit score, income and total assets are considered along with the primary borrower’s information. This translates to the co-borrower and the primary borrower combining their assets, credit history, and income for the loan. In general, a lender will usually consider the credit score of the person with the higher income. “By having a co-borrower, the person looking for a loan may qualify for a lower interest rate and higher loan amount,” Little explains.
Cons
Co-borrower = co-owner. “A co-borrower will have equal rights to the asset you’re applying for. The responsibility is shared, as is the home or other asset,” explains Rod Griffin, senior director of consumer education and advocacy at Experian.
Being a co-borrower
Pros
Potentially more favorable loan terms. If a primary borrower adds a co-borrower with a lower debt-to-income ratio, this may help someone qualify for a larger principal amount and lower interest rate. These factors all play into the underwriting decisions of lenders. Owners of a shared property would be able to afford to pay more.
Increased chances of loan approval. Being a co-borrower may help the primary borrower qualify for a loan when they otherwise would not be able to be approved.
Cons
Risk to your creditworthiness. Both borrowers are responsible for making sure that the monthly payments on the loan are made. If they are late, missed, or not paid in their entirety and the loan goes into default, a co-borrower can potentially damage their credit score.
Being tied to the loan. Co-borrowers remain tied to the loan payments for the long haul, regardless of life changes. For example, as a co-borrower, your loan obligations remain the same if you face financial hardships, such as a divorce or job loss.
What is a co-signer?
A co-signer signs a loan with another person and agrees to pay the loan if the primary borrower is not able to pay it back. Simply put, a co-signer accepts equal responsibility for repaying the loan.
Co-signers are commonly family members, such as a parent or spouse—or even a trusted friend—who guarantees to pay back the loan should the primary borrower default on payments.
“A co-signer must agree to repay a debt if the person for whom they are co-signing does not, but they don’t have any ownership rights to the property,” explains Griffin.
Having a co-signer
Pros
Improved loan approval chances. “Having a co-signer can improve your chances of qualifying and securing whatever form of credit you are applying for,” says Griffin. “In some instances, it can also help you qualify for better rates.”
Cons
Relationship risk. Think hard about how a loan-gone-bad could impact your relationship with your co-signer. When you applied and signed the loan, your relationship with the borrower was probably strong, so carefully consider how financial hardships or non-repayment could damage your relationship.
Being a co-signer
Pros
Benefit to both credit scores. If the loan is repaid on time, co-signing can help both borrowers improve their credit scores, according toGriffin.
Cons
Reduced borrowing power. If you are already a co-signer on a loan and you want to borrow other funds, you may face issues regarding your debt-to-income ratio. This happens because your co-signed loan will show up on credit reports, which lenders use to decide if your loan is approved. They may be reluctant to extend more credit or loans to you.
Negative impact on your credit scores. A co-signed loan shows up on your credit reports as if it were your own, so late or missed payments will appear on your credit report. Keep in mind, if the primary borrower stops paying and the loan goes into collection, this will show upon your credit reports.
Serious legal consequences. When a loan isn’t repaid, collectors will want to get their money. Bill collectors and lenders can sue you, put a lien on your property, even garnish your wages.
How to decide between being a co-borrower or co-signer
Deciding between having a co-signer and a co-borrower will depend on the type of credit you are applying for, your credit history, and your willingness to share responsibility for and ownership of an asset, explains Griffin. “You may not have a choice,” he adds. “The bank may determine which will apply to the financial agreement.”
When is a co-signer the best option?
A co-signer is typically the best option if only one person is going to benefit from the loan. For example, a parent may agree to co-sign on an apartment or a vehicle for their child if a lender or landlord has deemed the applicant’s credit history is not strong enough to qualify on their own, says Griffin. As Little of Wells Fargo puts it, “Co-signing is best for a borrower who doesn’t meet a lender’s qualification requirements and needs help qualifying for a loan or lower interest rate.”
When is co-borrowing the best option?
On the other hand, Little of Wells Fargo says that co-borrowing is best for people who want to share the responsibility of the loan payments and access to the assets tied to the loan, such as spouses.
What should I do before co-borrowing or co-signing?
Think carefully before signing onto either role. “As with any form of credit, before deciding to co-borrow or co-sign on a loan, you need to understand the terms and conditions you’re signing,” cautions Griffin. He also recommends ensuring you can trust the person you are co-signing for or co-borrowing with will hold up their end of the agreement so you are not left financially responsible.
Co-signer vs. co-borrower
A co-signer will only make payments if and when the primary borrower is unable to. A co-borrower may share in the payments, although that isn’t necessarily a requirement.
Another difference between the two is that a co-signer does not have any rights to the property, where a co-borrower does. For example, a car title would be in the primary borrower’s name, not also the co-signer’s name. If the primary borrower doesn’t pay, the co-signer doesn’t really have any claim to the property. Their obligation is to the creditor.
Co-borrowers are usually reserved for larger purchases like a home, whereas co-signers can be helpful for securing smaller forms of credit.
| Co-signer | Co-borrower | |
|---|---|---|
Payments | Co-signers only make payments if the primary borrower is unable to | Co-borrowers can share in the payments, but aren’t required to |
Property Rights | Co-signers don’t have any rights to the property | Co-borrowers have property rights |
Loan Size | Co-borrowers usually sign on for larger purchases, such as a home | Co-signers are typically helpful for securing smaller forms of credit |
TIME Stamp: Know which option to choose for a loan
Although co-borrowers and co-signers each have a legal responsibility to repay a loan, both of these options can be useful in varying situations.
A co-borrower applies for the loan along with a primary borrower; each of them has complete responsibility for the loan repayment and joint title over the assets covered by the loan. Having a co-borrower helps the primary borrower guarantee the loan will be paid back. They may also get more favorable loan terms because they have a co-borrower on the loan.
Having a cosigner added to a loan application improves the borrower’s chances of getting a loan approved. Typically, a co-signer is a parent, spouse, or close friend. A co-signer is legally responsible to pay any missed payments and even the full amount of the loan if the borrower doesn't pay. Be certain to understand that if a loan isn’t repaid, as a co-signer you are entirely responsible.
Frequently asked questions (FAQs)
What are the rights of a co-borrower?
A co-borrower shares ownership of the property, funds, or asset. For example, with a mortgage, a co-borrower has equal rights to the property.
Is it better to be a co-borrower or co-signer?
A co-borrower actually has more responsibility and ownership than a co-signer because a co-borrower's name is on the loan. They are equally responsible to make payments. A co-signer pledges to make payments if the primary borrower is unable to.
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