Co-borrower vs. Cosigner: How They Work
Adding a co-borrower or cosigner to your loan application can boost your odds of getting a loan at a lower interest rate. The terms “co-borrower” and “cosigner” come with important distinctions that affect the terms of your loan. Before signing a loan agreement, clarify with your lender if you have a co-borrower versus a cosigner to avoid future problems.
What is a co-borrower?
A co-borrower — also known as a co-applicant — is a second individual on your loan who shares responsibility and ownership with you of the debt from day one. Co-borrowers can help with repayment and also have a say in how the funds or assets are used. On a mortgage, for instance, both co-borrowers would appear on the title and have shared ownership of the property.
Co-borrowers can be used on many different types of loans. For example, you may get a joint mortgage or joint personal loan with a spouse or partner.
Pros and cons of a co-borrower
| Pros | Cons |
|---|---|
Improves your odds of loan approval at lower rates and higher amounts Equally shared assistance in repayment of a loan Can help improve your credit score if you make on-time payments | Risk to assets if the relationship between co-borrowers ends Both parties are held legally responsible if the loan defaults Hard credit pulls can cause both credit scores to slightly decrease |
Whether you have a thin credit history or a bad credit score, applying for a loan with a co-borrower can help you get approved. On top of that, a co-borrower takes equal responsibility in helping you repay the loan and managing the asset. A co-borrower can also help you qualify for bigger loans, since lenders view it as less risky to provide large loan amounts to two borrowers instead of one.
Keep in mind, however, that a co-borrower has equal ownership to funds and assets. For instance, if you and your spouse took out a joint loan on a house, you’ll need to protect your equity in a divorce settlement. Aside from that, both parties are held legally responsible for repaying the loan. So if you default on a loan, your lender can try to collect from both of you.
What is a cosigner?
A cosigner is a second individual on your loan application who can help boost your chances of approval. A cosigner doesn’t have ownership in the funds or the asset you’re signing a loan for. Though a cosigner isn’t obligated to help make payments, they will be on the hook if you miss payments.
For instance, a parent may cosign on a student loan because many college students are credit invisible. Other typical uses also include cosigning on a mortgage and cosigning on an auto loan.
Pros and cons of a cosigner
| Pros | Cons |
|---|---|
Can give you access to loans if you’re credit invisible or have little credit Improves your odds of loan approval at lower rates and higher amounts Can help improve your credit score if you make on-time payments | Cosigner can be held responsible for repayment if you default Cosigner’s credit score can be damaged if primary applicant doesn’t pay back loan on time Cosigner has no ownership when it comes to loan funds or assets |
Getting someone with good credit history to cosign on a loan can help you qualify for a loan you otherwise may not receive. However, your cosigner likely needs a good credit score to help you get approved. Once you’re approved for a loan, making payments can help you build equity, such as with a car or home, and boost your credit score if you make payments on time.
Keep in mind, cosigners don’t have any ownership of a loan’s funds or assets. For instance, if you get a personal loan with a cosigner, that cosigner won’t have any claim to your loan, and you’ll remain responsible for paying the loan back. However, if you stop making payments on the loan, the cosigner will be held responsible for repaying it. If they don’t, their credit can suffer.
Co-borrower vs. cosigner: How they compare
When preparing to sign a loan agreement with another person — whether that be a family member or friend — it’s important to understand the similarities and differences between co-borrowers versus cosigners.
Co-borrower vs. cosigner: How they’re different
The main differences between a co-borrower and a cosigner are responsibility of payments and ownership over assets.
A co-borrower shares claim over any distributed loan funds or the asset, such as a home or car. Cosigners, on the other hand, don’t have any legal claims to money from the lender or the property that the borrower purchases.
Another important distinction is that co-borrowers are responsible for recurring payments. A loan’s cosigner is only responsible for payments if the principal borrower stops making them.
Co-borrower vs. cosigner: How they’re similar
Both co-borrowers and cosigners can help primary borrowers obtain loans. This is because getting a loan can be hard if you have bad credit or little to no experience with credit. Getting access to a loan and making on-time payments can help a borrower improve their credit score.
Co-borrowers and cosigners are both on the hook if the loan isn’t repaid. Nonrepayment of a loan can result in both a co-borrower or cosigner’s credit score to drop, the loan to be sent to debt collections or the lender to file a lawsuit seeking repayment.
Co-borrower vs. cosigner: Which is best for you?
Whether you need a co-borrower or cosigner depends on the type of loan you want, your relationship to the other borrower and what you plan to get out of the loan.
For instance, a couple may want to be co-borrowers so they can share ownership of an asset and responsibility for repayment.
However, if you want your child to get access to college funds or help a loved one qualify for a loan, it may be better to consider our picks for best personal loans for a cosigner. That way you can boost their odds of approval as the cosigner, while leaving them with the primary responsibility of repayment and fund use.
Keep in mind that whether you’re a co-borrower or cosigner, taking out a loan with someone requires a lot of trust — so be sure you’re confident in your and the other borrower’s ability to repay the debt.