Cosigner vs. Co-Borrower for Auto Loans: What’s the Difference?
Quick Answer
A co-borrower on an auto loan is someone who has equal claim to the vehicle, as well as shared responsibility for paying the loan back. A cosigner, on the other hand, is there to help the primary borrower qualify; they don’t own the vehicle, but they share responsibility for the loan.
An auto loan cosigner is someone, usually a parent or friend, who helps boost the primary borrower's loan approval odds. They don't own the vehicle, but are legally responsible for repaying the loan if the borrower stops making payments. Auto loan co-borrowers, on the other hand, apply for a joint loan together and share equal ownership of the vehicle and debt.
Here's what to know about auto loan cosigners and co-borrowers and how they compare.
| Cosigner | Co-Borrower | |
|---|---|---|
| Purpose | Help the primary owner qualify | Share ownership of and responsibility for the car |
| Ownership | Primary borrower is the sole owner of the vehicle | Co-borrowers share equal ownership of the vehicle |
| Responsibility for loan repayment | Primary borrower; the cosigner only pays if the primary borrower doesn't | Co-borrowers share equal responsibility |
| Ease of approval | Can boost approval odds | Can boost approval odds |
| Credit score impact | On-time payments can boost the credit of both the primary borrower and the cosigner; missed payments can hurt both parties' credit | On-time payments can help boost both co-borrowers' credit; missed payments can hurt both parties' credit |
What Is an Auto Loan Cosigner?
An auto loan cosigner is someone who takes equal responsibility for repaying another person's loans if that person fails to pay. It's common for auto lenders to require a cosigner when the primary borrower has little or poor credit, limited income or a high debt-to-income ratio (DTI).
A cosigner should be able to qualify for a loan on their own. Lenders generally look for a cosigner who has good to excellent credit—often a credit score of 670 or higher—sufficient income to repay the loan and a DTI less than 50%, meaning their monthly minimum debt payments make up less than 50% of their income.
Pros and Cons of an Auto Loan Cosigner
Before choosing to be a cosigner on an auto loan or asking a friend or family member to cosign for your next vehicle, it's important to weigh out the pros and cons. Here's what to know:
Pros
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It may be easier to get approved. Adding a cosigner to a loan application may boost your chances of getting approved, especially if you have limited income or poor credit.
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Your credit history could improve. Cosigned loans appear on the credit reports of both the primary borrower and cosigner. If the loan's payments are made on time each month, both parties may say see their scores go up.
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You can help a friend or relative. Cosigning on an auto loan for someone with bad credit can help them get approved and secure a lower interest rate. And it can help the primary borrower learn to manage credit responsibly and build a credit history.
Cons
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Your credit could be at risk. As a cosigner, your score could drop if the primary borrower pays late or misses a payment. The derogatory item will stay on your credit report for up to seven years after they miss the payment.
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It's challenging to remove a cosigner. If a cosigner is no longer needed (or wanted), it can be difficult to remove them from an auto loan. Generally, the only way to remove a cosigner is for the primary borrower to refinance in their own name or pay off the loan in full.
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You're legally responsible for the debt. Cosigners are on the hook if the primary borrower falls behind on auto loan payments. And a collection agency could come after the cosigner to recover the loss. In some states, lenders can pursue the cosigner before targeting the primary borrower and take legal action to collect payment, like garnishing wages.
Learn more: What Happens if I Default on a Loan?
What Is an Auto Loan Co-Borrower?
Joint loans have more than one borrower, called co-borrowers. Co-borrowers on auto loans have an equal claim to the vehicle and are both responsible for paying the loan back. Joint loans are common in auto financing and can give lenders more assurance that you can repay the loan.
Pros and Cons of an Auto Loan Co-Borrower
Before deciding to be a co-borrower on auto loan or asking a friend or family member to sign a joint loan for your next vehicle, it's important to consider the pros and cons. Here's what to know.
Pros
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Your approval odds may go up. When you apply for an auto loan with a co-borrower, you're bringing two incomes, credit scores and DTIs. Having a co-borrower could boost your chances of getting approved for an auto loan, and may help you qualify for a larger loan.
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Your financial burden is reduced. Both co-borrowers are equally responsible for the debt on a joint auto loan. Sharing monthly payments with a co-borrower often makes it easier to make on-time payments and repay the debt.
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Your credit score may increase. Making your monthly payments on time every month can help improve both borrowers' credit—regardless of which co-borrower is making the payments.
Cons
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Some of your financial life is commingled with someone else. Sharing responsibility for paying off an auto loan with a co-borrower could create financial stress—especially if your co-borrower is unable to contribute toward payments.
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Your credit score could go down. Joint loans appear on the credit reports of all co-borrowers. So any late or missed payments could cause a hit to your credit health.
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You'll carry more debt. Adding a joint loan to your credit report increases your overall debt. And since your outstanding debt balances contribute to 30% of your FICO® ScoreΘ calculation, it could affect your ability to qualify for new credit down the road.
Cosigner vs. Co-Borrower
Borrowers can add a cosigner or co-borrower to an auto loan application, but having someone else cosign for a car isn't the same thing as taking out a joint loan.
Both a cosigner and a co-borrower share equal financial responsibility to repay an auto loan.
But unlike a cosigner, a co-borrower also shares ownership of the vehicle being financed by the loan. This means that all co-borrowers' names will be on the car title.
Generally speaking, a co-borrower usually contributes to loan payments. Cosigners, on the other hand, are typically only expected to repay the auto loan debt if the primary borrower defaults.
Learn more: How Bad Is It to Default on a Car Loan?
Should You Use a Cosigner or Co-Borrower?
If you're thinking about sharing an auto loan with someone else, it's important to understand when it makes sense to use a cosigner and when it's best to use a co-borrower. Here's what to know.
When to Use a Cosigner
Generally speaking, when a cosigner is used, the primary borrower receives the most benefits, while the cosigner helps offset the lender's risk. Here's when it may be smart choice to use a cosigner for an auto loan:
- The borrower has little to no credit history. Adding a cosigner to an auto loan may be a good idea if the primary borrower has little or poor credit. For instance, a parent might cosign a car loan for their college student who is just starting their credit journey.
- The borrower wants to be the only owner of the vehicle. If the primary borrower doesn't have the qualifications to obtain a loan or lease, but needs to be sole owner on the title, using a trusted cosigner can boost approval odds.
- The borrower can afford monthly payments on their own. Sometimes the primary borrower can afford to make the loan payments, but needs help to qualify for a loan. Applying with a cosigner can help them get approved and save hundreds or thousands of dollars in interest.
When to Use a Co-Borrower
A joint loan with a co-borrower is a major financial commitment, but it might make sense if:
- You want to share ownership of the car. Joint loans are common for large purchases like cars and homes. If you're buying a vehicle with a spouse, a joint loan could be a good fit.
- You want to secure better loan terms. When applying for a car loan, getting approved can be challenging if you have a high DTI or bad credit. But adding a co-borrower could make you a more attractive loan candidate.
- You want to share payments. Car payments can be expensive. If you can't swing the monthly payment for a new car by yourself, taking out an auto loan with a co-borrower could be a good option. Whether you split the payments 50/50 or take turns paying, sharing payments can help take some of the financial responsibility off your shoulders.
The Bottom Line
While having a cosigner or co-borrower can improve approval odds for a new auto loan, both options come with some risk. Before sharing a loan with anyone, it's important to weigh out the pros and cons carefully and consider if you want to be financially tied to someone else.
Your credit score is a key factor when seeking a new loan. The stronger your credit, the more likely you'll qualify for the best rates and terms. Whether you're the primary borrower, cosigner or co-borrower, you may benefit from free credit monitoring from Experian, which provides your FICO® Score and credit report for free, along with account alerts when there are changes to your credit report. It can show you where you stand and help you decide whether you should work on improving your credit before applying for a loan.
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About the author
Sarah Archambault
Sarah Archambault is a personal finance writer and editor who enjoys helping others figure out how to make smart financial decisions. She’s an expert in credit education, auto finance, banking, personal loans, insurance and credit cards.
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