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FINANCE

Differences Between a Co-Borrower vs. Cosigner

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When you have big goals or plans ahead, from college to car buying, taking out a loan is likely part of your approach. However, you must meet certain requirements to qualify for a loan, and some people need assistance meeting those requirements. One way to help you qualify is by using a co-borrower or cosigner. We'll help you determine whether that's a step you'll want to take.

What is a Co-Borrower?

A co-borrower applies for a loan along with the primary applicant and jointly takes on responsibility for repayment and co-ownership of the asset bought with the loan.

What is a Cosigner?

A cosigner serves as a kind of safety net by committing to take responsibility for repaying a loan if the primary borrower defaults. An advantage to this is that a cosigner won't have to make regular payments unless the primary borrower isn't able to make payments.

Like a co-borrower, both play a part in helping another person get a loan and agree to assume legal responsibility for repaying the loan if the primary borrower doesn't make payments.

Differences Between a Co-Borrower and a Cosigner

Co-borrowers and cosigners have distinct roles. Here's a quick look at how their responsibilities differ:

Co-Borrower Cosigner
Is listed on the title of the asset the loan is for Is not listed on the title of the asset the loan is for
Co-owns the asset Does not have any legal ownership of the asset
Makes regular loan payments along with the primary applicant Does not make regular loan payments unless the primary borrower fails to do so

When to Use a Co-Borrower

A co-borrower might be used when two people are going in on an asset together and plan to share the cost. For example, couples who want to purchase a big-ticket item together could apply for a loan as co-borrowers, or co-owners of a start-up could jointly take out a loan for their business.

In addition to having a partner to share financing with, a primary applicant may see an advantage in having a co-borrower to potentially help land a lower interest rate. Lenders will consider factors such as one of the co-borrower's stronger credit score or lower debt-to-income (DTI) ratio when determining loan rates. Similarly, a benefit of being co-borrowers is that both parties will share ownership of the asset.

When to Use a Cosigner

If a primary borrower might not qualify for a loan due to having no credit or poor credit, finding a cosigner may make the most sense.

A cosigner with good credit could help a younger borrower, such as a student who hasn't built much credit, or a borrower with poor credit, qualify for a loan and potentially get a lower interest rate than what the borrower alone could've gotten. Having a cosigner can indicate to a lender that the borrower is making the effort to cover responsibilities that go with taking out a loan.

People often look for a cosigner when borrowing money for the first time. For example, when taking out a student loan, car loan, or apartment lease. Or, for couples, the spouse with better credit could be a cosigner for the spouse with poorer credit who wants to take out a personal loan.

Risks of Being a Co-Borrower or Cosigner

With one main exception, the risks of being a co-borrower or cosigner are basically the same. The difference is that whereas co-borrowers make regular payments toward the loan, cosigners make payments only if the primary borrower isn't able to make them.

Otherwise, here's a look at risks for both co-borrowers and cosigners:

  • If the primary borrower makes late loan payments or fails to make payments, a co-borrower or cosigner is responsible for making payments in full — and may have to pay late fees or collection costs.
  • Under those same conditions, a co-borrower's or cosigner's credit score and history could be damaged.
  • If the primary borrower continues to miss payments, the co-borrower or cosigner could potentially be sued by the lender.

The Right Choice for You

If you ever need a loan to meet whatever unique goals and plans you have, remember a co-borrower or cosigner could help you get the money you need. Choosing the right one depends on your situation and the level of responsibility you would like the other person to have.

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