FINANCE
Differences Between a Co-Borrower vs. Cosigner
What You’ll Learn: The difference between a co-borrower and a cosigner
EXPECTED READ TIME: 4 MINUTES
When you have big 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 the difference between the two and 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. In this case, an “asset” is something like a house or car that might be purchased with a loan.
What Is a Cosigner?
A cosigner serves as a kind of safety net by agreeing to take responsibility for repaying a loan if the primary borrower defaults. A cosigner doesn't have to make regular payments unless the primary borrower isn't able to make payments.
A co-borrower and cosigner both 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:
Comparing a Co-Borrower and a Cosigner
While these terms sound similar, there are important distinctions between co-borrowers and cosigners. The essential differences are listed below:
|
Co-Borrower |
Cosigner |
|---|---|
|
Co-owns the asset and is named on the title of the asset |
Does not have any legal ownership of the asset and is not named on the title of the asset |
|
Shares ownership of funds from the loan |
Does not share ownership of funds from the loan |
|
Is equally responsible for regular loan payments along with the primary applicant |
Is not responsible for regular loan payments unless the primary borrower fails to pay |
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.
In addition to having a partner to share financing with, having a co-borrower could help you land a lower interest rate.
Lenders will consider factors such as one co-borrower's stronger credit score or lower debt-to-income (DTI) ratio when determining loan rates. Similarly, co-borrowers will share both ownership of the asset and responsibility for their shared loan.
Examples of When a Co-Borrower Might Help
Co-borrowers are most helpful when a borrower wants to share a loan or asset with another person. You might benefit from a co-borrower if you’re:
- Buying a house or condo with your partner
- Starting a business with another person*
Having a co-borrower could help you land a lower interest rate.
When to Use a Cosigner
If a primary borrower might not qualify for a loan because of lack of credit or poor credit, finding a cosigner may make the most sense.
A cosigner with good credit could help a primary borrower 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.
Examples of When a Cosigner Might Help
Cosigners are most helpful for borrowers who don’t have much credit or whose credit score is low. You might benefit from a cosigner if you’re:
- A young student taking out student loans
- A teen buying your first car
- Signing an apartment lease with weak or no credit
- Taking out a personal loan with little or no credit history
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 while co-borrowers are responsible for paying on a loan from the beginning, 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.
Cosigners make payments only if the primary borrower isn't able to make them.
Risks of Online Cosigners
It’s important to only co-borrow or cosign with someone you know and trust. While there are people online who will agree to act as a cosigner for a fee, this is not recommended for a number of reasons, including:
- High fees, possibly including part of the funds from your loan
- Risk of scams or fraudulent behavior
- Risk to private personal information
The Takeaway
If you need to borrow money but thought a loan was out of reach, think again! A co-borrower or cosigner could help you get the money you need at a lower rate, putting your unique financial goals in reach.
*PenFed does not offer business loans
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