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Co-borrowers and cosigners are both responsible for repaying a loan, but a co-borrower has shared ownership of the funds or asset, while a cosigner doesn't. Choosing one option over the other comes down to whether you need access to the loan funds, your goals for helping out on the loan and weighing the pros and cons.
What Is a Co-Borrower?
A co-borrower, also called a co-applicant, applies for a mortgage, line of credit or loan with another person. Co-borrowers share both the responsibilities, like repaying the loan, and the risks, such as added debt or possible missed payments. But they also enjoy equal access to the funds and assets tied to the loan.
For instance, say you and your partner want to buy a rental property. You both want an equal claim to the property and agree to accept equal responsibility for the mortgage payments. In this case, your lender will list you as co-borrowers, and both names appear on the property's title.
Understanding the benefits and risks of becoming a co-borrower ensures the agreement doesn't fall apart.
- Easier qualification: Because lenders look at two incomes instead of just one, you may qualify for the loan and a lower interest rate more easily. This is especially helpful if one of you has better credit than the other.
- Possible higher loan limit: Depending on your combined debt load, income and credit history, you may also qualify for a higher loan limit.
- Joint ownership: You and your co-borrower have equal access to the funds and the asset attached to the loan.
- Shared debt liability: Both co-borrowers are liable for the debt. That means that any missed or late payments can potentially hurt your credit. On the other hand, on-time payments may help your credit score.
- Possible dip in your credit score: Although temporary, when you apply for a loan, your lender will likely conduct a hard credit pull, which may cause a slight dip in your credit score.
- Risk to your relationship: If your co-borrower fails to live up to their part of the bargain, you may risk damaging your relationship.
What Is a Cosigner?
A cosigner takes on the full legal responsibility for repaying the loan if the primary borrower can't or won't pay. If the primary borrower has no credit history, a poor credit score, low income or a high debt-to-income ratio (DTI), adding a cosigner gives lenders the added confidence the loan will be repaid. However, unlike a co-borrower, a cosigner has no legal rights to possess the property or assets the loan was taken out to purchase.
For example, student loan borrowers may have no credit, little income or a short credit history and may need a cosigner to qualify for the best interest rates or terms on their private student loans. This is especially true when considering that the average private student loan debt in 2021 was about $55,000. Keep in mind that, as a cosigner, if the primary borrower misses a payment, you take on a legal obligation to make payments.
So, before you decide to cosign, there are several advantages and disadvantages to consider.
- Easier qualification: Adding yourself as a cosigner may make it easier for the primary borrower to qualify for a loan. They may even be eligible for a better interest rate and loan terms.
- Possible credit boost for the borrower: Cosigning a loan can help the primary borrower build good credit by making on-time payments.
- Borrower ownership: By becoming a cosigner, you help the primary borrower gain ownership of the asset, like a vehicle, that they may not be able to alone.
- Good credit necessary: Generally, you'll only be able to cosign on a loan if you have good credit.
- Possible credit damage: If the primary borrower is late or misses any payments on the loan, your credit can take a hit. You will also be responsible for repaying the balance on the loan if this happens.
- Temporary credit implications: When you cosign for a loan, the lender will do a hard credit pull, which may cause a slight dip in your credit score. But this dip is temporary and will lessen over time.
- No ownership: As a cosigner, your help allows the individual to get a loan. But, even though you're on the hook for payments if the other person misses them, you have no rights to own the asset, such as a house if you're a cosigner on a mortgage.
- Risk to your relationship: If the borrower doesn't make payments and you're forced to pay for them, it could damage your relationship.
How to Decide Between Being a Co-Borrower or Cosigner
Deciding between being a co-borrower or cosigner depends partly on what you want to get out of the loan. Becoming a cosigner is best to help a borrower who can't qualify for a loan on their own or needs help securing a lower interest rate and better terms.
Co-borrowing is best for spouses or partners who want to share the responsibility of the loan payments and have access to the funds or assets tied to the loan.
The Bottom Line
If you wish to share ownership in a home or other asset with your partner, opt to become a co-borrower. But if you just want to help someone qualify for a loan, becoming a cosigner may be a better choice. Cosigning is also best when everyone agrees that the primary borrower is the one responsible for paying back the loan, and when the cosigner is confident the primary borrower will follow through on loan payment.
No matter which option you choose, having solid credit is important to help secure the best loan rates and terms. To see where you stand, you can check your credit score or receive your credit report from Experian for free.