At a Glance
During the process of applying for a loan, you may have seen the option to add a co-borrower or co-signer and been confused by the terms. While these terms seem similar and can seemingly have similar purposes when it comes to loans, they are quite different.
What is a co-borrower
Put simply, a co-borrower is someone who agrees to take on the responsibility of a loan with you. They are equally responsible for the loan and can make payments on it in conjunction with you. Co-borrowers share the legal right to the asset as well as the legal responsibility for paying it from the get-go.
How does a co-borrower loan work?
When applying with a co-borrower, both parties have a legal responsibility to pay back whatever is owed. The amount paid back on a consistent basis can come from either person’s account, either partially or in-full, so long as the total amount is paid back on time. Co-borrowers typically share legal rights to assets.
What is a co-signer
On the other hand, a co-signer does not take on financial responsibility for a loan or asset unless the primary borrower defaults on their payments. A co-signer is typically used to help somebody get approved for a loan, who may not otherwise get approved. They usually have a higher credit score and stronger financial history than the applicant. Common examples may include parents becoming co-signers on their child’s first apartment or car, where the child doesn’t have an established history of credit.
How co-signer loan works
A co-signer acts as a guarantor for a primary borrower but isn’t responsible for making any payments unless the primary borrower defaults. All responsibility for what is being borrowed is with the primary borrower until the event of default. At that point, should it occur, the co-signer takes on all legal responsibility.
Difference between co-borrower vs co-signer
|Has full legal responsibility along with the other borrower||Only has legal responsibility if primary borrower defaults|
|Both borrowers typically desire what is being borrowed for the same purpose||What is being borrowed is typically only desired by the primary borrower|
|Both parties are beneficiaries of funds or assets||Only the primary borrower is the beneficiary of the funds or assets|
Pros and cons of co-borrower
There are certain pros and cons to co-borrowers and co-signers that are important to consider when deciding which path is right for you. Here are the pros and cons of having a co-borrower:
Pros of co-borrowers
- All applicants on the loan will be able to build credit by making on-time and in-full payments
- Both applicants can enjoy the loan purpose
- Potentially reduced interest rate with a higher principal payment
Cons of co-borrowers
- Either borrower failing to contribute to the loan results in one person taking on the full brunt of the loan
- Two parties are financially responsible regardless of how their personal relationship potentially changes (divorce, friendship falling out, etc.)
Pros and cons of co-signer
As with co-borrowers, there are certainly pros and cons to being or having a co-signer. Here are some of the most prominent:
Pros of co-signers
- Ability to qualify for a loan you may not have qualified for before
- The asset fully belongs to you and not the co-signer
Cons of co-signers
- As a co-signer, you may eventually become responsible for the payments on an asset or loan
- The credit scores and history of both parties can be damaged if payments are not met by the primary borrower
When is co-borrowing a right option?
When two people wish to share equal responsibility for payments on a loan or asset and wish to both be able to use that loan or asset, co-borrowing is the best choice. You will typically see co-borrowing with joint mortgages for homes between spouses, joint auto loans for a car, or joint business loans. Just remember that no matter what happens to your relationship with your co-borrower, you will still both be legally responsible for completing payments.
When is a co-signer the best option?
On the other hand, a co-signer is the best option when it’s clear that only the primary borrower should be responsible for payments and the use of the loan or asset. While responsibility will fall to the co-signer in the event the primary borrower defaults, co-signers typically have no desire to use whatever the asset is and are usually just helping the primary borrower get approved.
How to decide between being a co-borrower or co-signer?
Deciding whether you want to be a co-borrower or co-signer depends entirely on what you want to get out of the loan. Should you wish to be equally responsible for payments legally and have access to whatever is being borrowed or paid off, being a co-borrower is the best choice. If you have no desire to use whatever is being borrowed and are simply helping someone get approved, being a co-signer is the best choice.
What should I do before co-borrowing or co-signing?
Regardless of whether you are using a co-borrower or co-signer, take the time to sit down with the other party and discuss the loan. Determine whether the loan is necessary and be sure to clarify that all parties responsible for payments can meet their agreed-upon obligations. Discuss alternatives and what happens if somebody cannot meet payments.
For larger real estate investments where two borrowers want to share equal responsibility for payments, co-borrowing may make the most sense. By having two streams of income listed on your application, you may be able to be approved for larger loans that can grant access to more real estate.
To decide between being a co-borrower and co-signer, determine who is desiring what is being borrowed and what it will be used for. Also take the time to look at who wants to be financially and legally responsible.
A co-mortgagor is essentially a co-borrower on a mortgage loan. A co-mortgagor is someone who shares equal financial and legal responsibility for the mortgage loan and legally claims partial ownership in the underlying asset. They are not a co-signer.