Co-signer or Co-Borrower?

Terri Chevrefils

What’s the biggest difference between a co-borrower and a cosigner? It relates to the degree of investment in the loan. Here are the details:

Although it’s common to be the only borrower on a loan application, there are instances where you may want to add a second person. You can either add a co-signer or co-borrower. While a co-signer can help you qualify for a loan, a co-borrower is an equal participant in the repayment process. Choosing between the two comes down to your personal circumstances.

A co-borrower is someone who applies for a loan or line of credit with another borrower. The co-borrower has equal access to the funds tied to the loan. Both the co-borrower and primary borrower are responsible for payments. Some lenders refer to these parties as loan co-applicants.  In this case, the lender will examine both of your incomes, credit scores, assets and other debts to qualify your application. Often, having two incomes will help you qualify for a higher loan limit or better terms.

A co-signer is often used for borrowers who have poor credit or a short credit history and require a co-signer to qualify for a loan or receive lower interest rates. An individual who co-signs a loan agrees to take financial and legal responsibility for the loan in case the original borrower stops making payments or defaults.

The co-signer must have a good credit score, stable employment and enough income to cover the cost of the loan. The co-signer does not have to be a direct relative; it can be a friend, co-worker or spouse.  With a co-signer, you won’t have to up any collateral or accept responsibility for regular payments.  Also, if you make a one-time payments as the primary borrower, you may boost your credit score.

If you have a choice between cosigning and co-borrowing, the right approach depends on what your goals are for the loan. Here’s what you should consider with each option.

Pros of Using a Co-borrower:

• You may qualify for a lower interest rate
• You can receive a higher loan limit

Cons of Using a Co-borrower:

• You can potentially damage the co-borrower’s credit score if you fall behind on payment
• Both borrowers are responsible for the monthly payments; if you get divorced, you’re still both on the hook for the loan

Pros of Using a Co-signer:

• You can qualify for a loan or lower interest rate
• You are the sole owner of the asset tied to the loan

Cons of Using a Co-signer:

• You are fully responsible for the payments
• You can damage the co-signer’s credit history if you fall behind on payments, along with your own

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

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