If you’re in the market for a loan or a line of credit, depending on your financial situation, you may need to apply with someone else. Enter the co-signer or co-borrower.
Whether you’re considering asking someone to step into one of these roles, or you’re thinking about stepping into one of these roles, it’s important to know the risks and responsibilities of each one.
Should you ask someone to be a co-signer or a co-borrower? Should you be a co-signer or a co-borrower? To help you decide which role best fits your situation, we’ll look at some key aspects of being a co-signer and a co-borrower.
What Is a Co-Signer?
A co-signer signs on to a loan (or credit card) to help a primary borrower qualify or get better terms. While monthly loan or card payments are the primary borrower’s responsibility, when you’re a co-signer, you’re agreeing to make monthly payments if the primary borrower can’t.
The ideal co-signer should have a high credit score and/or make more money than the primary borrower. Lenders review both the primary borrower and co-signer’s credit history and income during the application process. The co-signer’s stronger financial and credit profile should increase the chances of loan approval for the primary borrower.
Co-signers are usually close to the primary borrower. They can be a family member, a partner or a close friend. For example, if you have a thin credit history or bad credit but need a car loan or a private student loan, you could ask one of your parents to co-sign your loan to help you get approved.
As long as the primary borrower keeps making their monthly payments, a co-signer is not responsible for loan repayment, and it does not affect their credit scores.
You have the pleasure of knowing you helped someone close to you achieve a financial goal by helping them secure financing.
If the primary borrower defaults, you must repay the loan. If your payments are late or you miss payments, your credit scores will be damaged.
You don’t own the physical property or asset associated with the loan, and you can’t use any borrowed funds.
It may be harder to take out a loan because the co-signed debt will also show up on your credit report, affecting your debt-to-income (DTI) ratio.
What Is a Co-Borrower?
A co-borrower, aka a co-applicant, joins forces with the primary borrower to take out a loan together. All co-borrowers are responsible for repaying the loan, and each has access to the loan’s assets – whether it’s a car or money from a personal loan.
Lenders review borrowers’ creditworthiness and income to approve the loan application. They are more likely to approve a higher loan amount or better loan terms, like a lower interest rate, because there are two borrowers instead of one.
Ideally, you want a co-borrower with good credit and a stable income because you’re both responsible for loan repayment. But unlike co-signers, a co-borrower’s income doesn’t have to be higher than the primary borrower’s income.
Co-borrowers typically borrow money for joint ventures. For example, you and a friend may decide to go into business together and need a business or personal loan for your startup. If you apply for the loan as co-borrowers, you each could access the funds. And both of you would repay the loan together.
All borrowers have ownership rights to any physical property or assets associated with the loan and access to any borrowed funds.
Using multiple incomes and credit scores might help co-borrowers qualify for better loan terms or a larger loan than if each borrower applied individually.
Your credit scores may improve if you make on-time payments and the loan servicer reports your payments to the credit bureaus.
You’re responsible for making monthly payments at the start of the loan.
You’re responsible for the entire loan amount, not only “your half.” If a co-borrower misses payments, that will affect other co-borrowers, including damaging everyone’s credit scores.
What Is the Difference Between a Co-Signer and a Co-Borrower?
While there are many differences between a co-signer and a co-borrower, the main difference is ownership and financial risk.
Here’s a quick overview of the main differences between the two roles:
|Purpose:||To help the primary borrower qualify for a loan||To apply for and use a loan with another borrower|
|Responsibility:||Not responsible for the debt unless the primary borrower can’t repay it||Takes on equal responsibility for the debt and begins repayment at the start of the loan|
|Ownership:||Does not have ownership rights or access to funds||Shares ownership and has access to funds|
Mortgages: The exception
When it comes to co-borrowers for mortgages, there’s no difference between a co-borrower and a co-signer. Both borrowers are usually called co-applicants. You and your co-applicant will decide who has ownership rights to the property depending on who resides on the property.
For example, if you are a co-applicant with no ownership rights (similar to a co-signer), you would be a non-occupant co-applicant. But if you are a co-applicant with ownership rights (similar to a co-borrower), you would be a co-applicant.
Is It Better To Be a Co-Signer or a Co-Borrower?
If you’re wondering whether it’s better to be a co-signer or a co-borrower, it depends on your situation and goals for the loan.
It may be better to be a co-signer when:
- You don’t want ownership or access to funds, and you don’t want to share monthly payments.
- You want the option to be released from the loan if the primary borrower refinances the loan or if co-signer release is available.
It may be better to be a co-borrower when:
- You want ownership rights or access to funds, and you are willing to make monthly payments.
- You want to be responsible for the loan and continue to have access to any assets after the death of the co-borrower.
Know Your Responsibilities Before Signing on the Dotted Line
Make sure the person you ask to be a co-signer or co-borrower can afford to make the payments. While a co-signer isn’t responsible for making regularly scheduled loan payments, a co-signer should be prepared to make payments in case the primary borrower can’t.
If someone wants you to co-sign a loan or be a co-borrower, consider how committing to either role might affect your future goals. Are you in a position to help? Will you be unaffected, or will it cause financial stress?
Think about all the possibilities carefully before you make a decision.