Co-Borrower Vs. Co-Signer: Pros, Cons And Differences
A borrower with a good credit history may be able to qualify for the best rates and terms on a loan. However, if your credit score is lower than you would like or prohibiting you from qualifying, you can strengthen your loan application by applying with a co-borrower or co-signer.
Both can help you when you need financing to buy a house, and both are responsible for repaying the loan if you default on it, but that’s where the similarities end.
What Is The Difference Between A Co-Signer And A Co-Borrower?
The main difference between a co-signer and a co-borrower is the responsibility for payments and ownership of the assets. Here’s an overview of each role:
- Co-signer. A co-signer lets you leverage their good credit score when applying for a loan. This individual is usually a family member or close friend. They’re only responsible for taking over the monthly payment if you default on your loan. They don’t have any ownership over the assets.
- Co-borrower. A co-borrower is someone you apply for a loan with, usually a family member or spouse with equal ownership over the investment. A co-borrower is also responsible for making the regular monthly payments.
Here’s a quick overview of the differences between the two:
Co-Signer vs. Co-Borrower Explained
| Co-Signer | Co-Borrower |
|---|---|
| Allows the borrower to level their good credit – usually a family member or friend. | Someone you jointly apply for a loan with – usually a spouse or family member. |
| Assumes financial responsibility for the loan if the borrower defaults on it. | Is equally responsible for making the monthly payments. |
| Has no ownership over the assets, and their name isn’t listed on the deed. | Has full ownership over the assets, and their name is listed on the deed. |
If you’re considering adding a co-signer or co-borrower to a mortgage loan application, you want to look for someone you trust. Both options come with a certain level of risk, so you want to make sure everyone understands their responsibility.
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What Is A Co-Signer?
A co-signer is usually a family member or friend who helps strengthen a borrower’s mortgage application by combining their income and credit history with the borrower’s. The co-signer must repay the debt if the borrower fails to make their loan payments.
However, a co-signer isn’t responsible for making monthly payments on the loan, and their name isn’t listed on the deed. Most people use a co-signer when applying for student loans or auto loans.
Who A Co-Signer Works Best For
A co-signer is best if you’re just looking for someone to help you qualify for the loan. For example, if you’re a young adult with limited credit history and have difficulty qualifying for private student loans, applying with a co-signer may be a good option. You should take on a co-signer only if you are confident in your ability to repay the loan, as your default puts their finances and credit at risk, too.
Pros Of A Co-Signer
In the right situation, applying with a co-signer can be a mutually beneficial relationship for both parties. Here are some of the most significant benefits of using a co-signer:
- Increased approval odds. Applying with a creditworthy co-signer will improve your odds of qualifying for a loan, especially if you have poor credit or limited credit history.
- Lower interest rates. Leveraging another borrower’s excellent credit score can help you qualify for the lowest interest rates and best terms on your loan.
- Improved credit. Making on-time payments will improve both individuals’ credit scores.
Cons Of A Co-Signer
Here are some downsides you and your co-signer should consider before applying:
- Financial responsibility. If you can’t make the monthly loan payments, your co-signer must assume financial responsibility for the loan.
- Damaged credit. Both you and your co-signer will see credit scores and histories suffer if you make the monthly payments late.
- Potential to damage relationships. If you can’t manage the loan responsibly, you could damage the relationship with your co-signer.
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What Is A Co-Borrower?
A co-borrower shares financial responsibility for a loan from the start and shares equal responsibility for making the monthly payments. They also share ownership of the asset. A co-borrower’s credit history and income are factored in to help a borrower qualify for a loan. While this isn’t always the case, co-borrowers are typically listed on the house title.
Who A Co-Borrower Works Best For
A co-borrower usually works best when both borrowers want to share the responsibility and benefit of the loan. For example, a married couple applying for a mortgage together would be considered co-borrowers.
Pros Of A Co-Borrower
Here are the most significant benefits of using a co-borrower:
- Mutually beneficial. Both borrowers have equal ownership of the property and share responsibility for the monthly payments.
- Easier to qualify. If your co-borrower has good credit and a low debt-to-income ratio, it’ll be easier to qualify for the loan.
Cons Of A Co-Borrower
Here are some things to consider before using a co-borrower:
- Equal responsibility. Co-borrowers are equally responsible for making the monthly payments and repaying the loan.
- Legal repercussions. If one co-borrower dies and the other borrower isn’t listed as a successor on the deed, this can cause legal challenges.
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Co-Borrowers Vs. Co-Signers: How Are They Similar?
While the two are different, there are some similarities between co-borrowers and co-signers.
Help Secure Larger Loans And Lower Interest Rates
Both co-borrowers and co-signers can help the primary borrowers secure a larger loan and lower interest rates. If you have bad credit, you can benefit from the other borrower’s low debt-to-income ratio and good credit history.
Accept Financial Responsibility For The Loan
Though the level of financial responsibility varies a little, both co-borrowers and co-signers are ultimately responsible for repaying the loan. If the primary borrower defaults on the loan, the co-borrower or co-signer must take over the monthly payments.
What To Consider Before Co-Borrowing Or Co-Signing
Taking out a loan with a co-borrower or co-signer can be a good choice, depending on your financial situation, your relationship with the co-signer or co-borrower, and the risks to your and the other party’s credit.
Current And Future Finances
It’s important to consider your current and future financial situation before applying for a loan with a co-signer or co-borrower. Make sure you can afford to repay the loan. If you default, you will damage the other person’s credit and put them in a difficult financial situation.
Set Up A Backup Plan
It’s a good idea to explore your alternatives before applying with a co-borrower or co-signer. For example, could you spend time improving your credit score first? Would your lender allow a co-signer or co-borrower to be removed in the future?
Credit Utilization
It’s also a good idea to look at your credit utilization rate before using a co-borrower or co-signer. Your credit utilization rate is how much of your available credit you’ve used, and a high rate can indicate you’re over-extended financially. A high credit utilization rate could negatively impact your co-signer’s credit.
Co-Borrower Vs. Co-Signer: Which Is Best For You?
A co-borrower makes regular payments on a mortgage loan because they share ownership with the borrower. A co-signer only becomes responsible for payments if the borrower defaults on the loan, whether they’re on the house deed or not.
A co-signer is a better option if you only need to leverage another person’s good credit history. You don’t want them to put down any money for the loan or be responsible for the monthly payments. You get to enjoy full ownership of the property and just need a co-signer to qualify for better rates and terms on the loan.
In comparison, a co-borrower makes sense if you want to share ownership of the loan with another individual. By applying together, you can qualify for a larger loan amount and lower interest rates. For example, married couples usually act as co-borrowers when taking out a home loan.
FAQ
Here are answers to common questions about applying for a loan with a co-signer or co-borrower.
The Bottom Line
Choosing between a co-signer and a co-borrower can be a difficult decision. Which one you choose will largely depend on your financial goals. Whatever your choice, it’s important to look for someone you trust and can communicate openly with.
