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A co-borrower, or co-applicant, is someone who applies for financing with another person. Co-borrowers have a shared interest in the debt and are equally responsible for making the payments. In addition to joint responsibility, co-borrowers also share ownership of the funds and any asset purchased using the loan, like a house or car. Find out what co-borrowing means, how it differs from cosigning and how it affects your credit.
Understand What It Means to Be a Co-Borrower
When you become a co-borrower on a loan, both your name and the primary borrower's name appear on all loan documents. Instead of using only one income to meet the loan requirements, lenders use each applicant's income, credit history and other factors.
For example, let's say you want to buy a new home with your spouse or partner. You both want an equal claim to the property and plan to accept equal responsibility for the mortgage payments. In this case, your lender will list you as co-borrowers, and both names will appear on the property's title. The same holds true for the co-ownership of a vehicle or other asset.
Combining resources can help lower your debt-to-income ratio (DTI), which can help you qualify for the loan. If one party has a significantly higher credit score than the other, it may also qualify you for better rates and terms. And if one borrower can't qualify for a loan on their own, adding a co-borrower can give a lender the added assurance the debt will be repaid, improving the chances of approval.
Cosigner vs. Co-Borrower
The terms cosigner and co-borrower are often used interchangeably, but there are key differences. Along with the primary borrower, a cosigner is legally responsible for paying back a loan, missed payments or even the full amount if the borrower doesn't pay—but they have no legal right to the loan proceeds. By contrast, a co-borrower shares the responsibility for repaying the loan with another person and has access to the loan funds.
Cosigner
- If you are the primary borrower, the lender will look at your cosigner's credit history and credit score along with yours, so you may qualify for a higher loan limit.
- Generally, a cosigner doesn't have shared ownership of the funds or the asset purchased with the loan.
- Adding a cosigner to your loan may help you qualify if you have little or no credit history or your credit score is poor. Plus, any payments you make on time can help build your credit.
- A cosigner is responsible for making payments on the loan if you can't.
Co-Borrower
- Lenders generally consider both borrowers' incomes when applying for a loan.
- Lenders typically establish loan rates using the lowest median credit score of both applicants. This means you might qualify for a better rate as a co-borrower than you would if you applied independently.
- Since co-borrowers are both liable for the debt, any past-due payments have the potential to hurt both parties' credit scores. Then again, on-time payments can help boost both borrowers' credit scores.
- Most often, a co-borrower will have shared ownership of the funds or asset purchased with the loan.
How Being a Co-Borrower Affects Your Credit
As a co-borrower, you share responsibility and assume the same risks for repayments on the debt. When you apply for financing, your lender will conduct a hard credit inquiry, which may cause a slight dip in your credit score. This dip is temporary and will lessen over time.
Missing payments or defaulting on the loan can hurt both co-borrowers' credit scores and affect their ability to qualify for future financing. Thankfully, lenders don't report payments as late until they're at least 30 days past due. So if you just missed a payment, make sure to bring your account current as soon as possible to avoid hurting your credit scores. That said, lenders may still charge fees or interest on late payments, so it's best to set up autopay to avoid issues.
On the flip side, managing your debt responsibly and making your payments on time can help you improve and build your credit.
Same Risks, Better Benefits
As the co-borrower on a loan, you have added benefits over a cosigner thanks to shared ownership of the funds or asset. But you also carry the same financial risks. Naturally, you want the best rates and terms on your loan. But if your credit isn't up to snuff, you may be able to improve your FICO® Score☉ powered by Experian with Experian Boost®ø. This feature allows you to get credit for eligible on-time phone, utility and streaming service payments—potentially increasing your credit score immediately for free.