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Co-Borrower vs. Cosigner Roles Explained

WRITTEN BY:

RONALD JOHNSON

EDITED BY:

LARRY HENDERSON

REVIEWED BY:

SHANTEL MYERS

TIME TO READ

4 MIN

UPDATE DATE:

OCTOBER 9, 2024

Co-Borrower vs. Cosigner Roles Explained

A cosigner or co-borrower becomes relevant if you want to take out a loan but have a poor credit history or low income. While both increase the likelihood of loan acceptance, they achieve this differently. The co-borrower can use the obtained funds and share the liability for loan repayment with the primary borrower. A co-signer has no access to the amount borrowed, but they agree to repay the loan if the principal borrower defaults. It is essential to understand these differences since they pose financial risks, impact legal requirements and credit ratings.

Key takeaways:

A co-borrower shares both financial responsibilities and rights and can use the borrowed amount or co-own the purchased property.
A co-signer can’t use the borrowed money and only becomes responsible for loan repayment if a primary borrower defaults.
Adding a co-borrower or a co-signer to a loan application increases your approval chances and can potentially lead to higher loan amounts and better borrowing terms.
Late or missed payments might affect both a primary borrower and a guarantor on loan.

What is a Co-Borrower?

A co-borrower on a loan applies for funds with you and shares equal repayment obligations and rights to the assets. For example, if you take out a mortgage with a co-borrower, you have equal property rights.

Applying for a loan jointly with a co-borrower can benefit people with bad credit. It increases your chances of loan approval and makes it possible to obtain a larger loan. Moreover, the responsibility for debt is shared equally between the borrower and co-borrower, which can significantly simplify matters for many.

Advantages of a Co-Borrower

A co-borrower on a loan offers several advantages:

Increased chances of approval. A joint loan minimizes risks for the lender, which raises the likelihood of loan approval.
Access to a larger loan amount. When applying for a loan with a co-borrower, the income of both persons is taken into account, allowing you to receive a larger sum than when applying without one.
Better loan conditions. A secondary borrower results in better financing terms due to the lender’s reduced risk. Thus, a loan with a co-borrower may have lower interest rates.
Boost of a credit rating. If the loan is repaid on time, the credit history of both the borrower and the co-borrower will improve.
Accessibility for people with low credit ratings. If you have a bad credit history, you can attract a co-borrower with a good credit rating, which will increase the likelihood of loan approval and open access to favorable lending conditions.

Disadvantages of a Co-Borrower

There are also several disadvantages of adding a co-borrower:

Shared accountability. All obligations shift to the co-borrower if the principal borrower cannot repay the debt. The co-borrower may experience financial troubles as a result.
Credit history is at risk. Both credit histories will suffer if the loan is not repaid on time.
Relationship difficulties. Personal connections can be strained by financial difficulties, particularly if you have trouble repaying a loan.
Difficulties with dividing property. Disagreements may occur during division since the borrower and the co-borrower have equal rights to the obtained assets or property.

What is a Cosigner?

A cosigner is an additional applicant on your loan who can boost your chances of acceptance. Nevertheless, the guarantor is not entitled to the money you borrow. The guarantor agrees to repay the debt only if the borrower cannot do so. Using a cosigner with excellent credit can help you get better loan terms if you have a poor credit history.

Advantages of a Cosigner

A loan guarantor offers several benefits for both the borrower and the lender:

There is a high probability of loan approval. A guarantor with a good credit history and high income guarantees the lender that the loan will be repaid, allowing them to decide in favor of approval.
Access to better lending conditions. The borrower can access more favorable terms, such as lower interest rates, longer loan terms, and larger loan amounts.
Possibility of lending without collateral. A surety can replace the need for collateral, which is useful for borrowers who do not have suitable property to pledge.

Disadvantages of a Cosigner

There are also certain disadvantages when using a loan guarantor:

Risk to the guarantor’s finances. The guarantor will be responsible for covering loan payments if the borrower defaults.
Risk to the credit history. If the borrower defaults on the loan, the guarantor’s credit history will be badly impacted, making future loan applications more challenging.
Liability in law. Under the terms of the loan arrangement, the guarantor is legally obligated, and if the borrower stops paying, legal action may be taken.
Psychological strain. Financial troubles could jeopardize the borrower and guarantor’s relationship.
Restriction on a cosigner’s creditworthiness. Lenders will take possible guarantor duties into account. Thus, guarantors may encounter limitations when trying to get a personal loan.

Differences Between a Cosigner and a Co-Borrower

Here is a comparison table between a co-borrower and a co-signer:

Criterion	Co-borrower	Co-signer
Role	Become a co-owner of the loan, share ownership of the assets or real estate acquired with the loan.	If the main borrower fails to repay the loan, the guarantor undertakes to repay it, and they have no access to the funds received.
Financial responsibility	Participates in loan repayment and pays an equal part of the money.	Only becomes involved when the borrower stops making loan payments, taking on temporary financial obligations.
Impact on credit history	A credit rating may drop due to late payments and improve with on-time loan repayments.	Negative effects only occur when the borrower fails to make payments.
Legal liability	The co-borrower has joint ownership of the asset financed through the loan and shares full legal responsibility equally with the borrower.	Legal liability only comes into play if the borrower defaults.
Impact on own credit capabilities	The increased debt load can make it more difficult to get more loans.	Less influence on obtaining loans as long as the borrower makes their payments on time.
Asset management	Has equal rights to the funds received.	Does not manage or use an asset purchased with the loan funds.
Long-term consequences	If the loan is used wisely and paid back on schedule, it can improve your financial situation.	A surety bond can harm long-term financial stability if the borrower defaults on their obligations.
Motivation for participation	Often motivated by the ability to acquire or use an asset financed by a loan.	Helping the borrower is usually motivated by a desire to do so, frequently because of commitments or personal ties.

Cosigner vs. Co-Borrower: Which Option is Best for You?

You may add a co-borrower or a guarantor to a loan depending on the particular requirements and circumstances. Here are some factors that could lead you to select one over the other.

Co-Borrower

A co-borrower owns the asset bought or financed and bears equal responsibility for its repayment. This choice is frequently appropriate in the following situations:

Marriage or Partnership: Co-borrowers frequently apply when they wish to share ownership of a property, such as a car or house. Income and credit scores of both parties are taken into account, possibly resulting in more advantageous loan terms.
Business Partnerships: Business partners may involve a joint application when seeking financing for operations to demonstrate greater financial stability.
Investment Properties: To split the costs and rewards of joint property ownership, friends or family members investing in real estate may decide to become co-borrowers.

Cosigner

A cosigner guarantees loan repayment but has no ownership rights in the collateral. This option is frequently selected in the following situations:

Building Credit: To be eligible for their first loans or credit cards, people—especially young adults or immigrants—may require a guarantor.
Insufficient Income: A cosigner may be able to help meet the lender’s standards if the primary borrower’s income is too low to make them eligible for the loan on their own.
Recovering from Bad Credit: People who want to repair their credit history after experiencing financial difficulties (such as defaults or bankruptcy) may employ a guarantor to obtain loans.

Making the Choice

The following elements must be taken into account when deciding between a guarantor and a co-borrower:

Financial Implications: Either choice may considerably impact the finances of the co-borrowers or cosigners. If the loan is not repaid, both parties’ credit ratings may suffer.
Relationship Risk: Dealings with money can be stressful for relationships, particularly in the event of a loan default. It’s crucial to communicate and make clear agreements.
Long-Term Impact: Consider how sharing debt or responsibility may affect you. Co-borrowers are bound by one another until the debt is paid in full, which can make situations like getting a divorce or seeking to sell an asset more difficult.

If you still have doubts and don’t know what to do, contact professionals. A financial counselor can provide personalized advice based on your goals and financial situation.

Bottom Line

Before you apply for a loan using a guarantor or co-borrower, ask yourself a few questions:

Do you have the financial ability to pay your loan regularly?
Is your income stable?
How will sharing your loan commitments impact your future goals?
What type of loan do you need?

Taking out a loan with a co-borrower makes sense when you and your spouse have a common goal – to buy an apartment, for example. Adding a cosigner is a good option if your credit history is bad but you need money.

FAQ

Why Would a Borrower Get a Cosigner for a Loan?

A bad credit history or unstable income can make it difficult to get a loan or result in higher interest rates. To increase the likelihood of loan approval or to obtain favorable conditions, borrowers turn to a guarantor with a stable income and a good credit rating.

Is a Co-Borrower the Same as a Cosigner?

No, a co-signer and a co-borrower are not the same thing. In addition to sharing loan repayment obligations, a co-borrower owns a share of the item(s) purchased with the proceeds. A cosigner assumes responsibility for the debt if the principal borrower defaults, but they do not hold any ownership rights.

Does a Co-Borrower Have Ownership?

Yes. Both rights and responsibilities are distributed equally between the borrower and the co-borrower.

Is It Better to Have a Co-Borrower on a Loan?

Having a co-borrower can help you qualify for a higher interest rate, a larger loan amount, and better terms. Nevertheless, the fact that both persons must repay the loan equally may be a drawback if future disputes or financial difficulties arise.

What are the Risks of Having a Personal Loan Cosigner?

Having a cosigner for a personal loan comes with risks such as probable harm to the guarantor’s credit rating if the loan is not repaid on time, legal responsibility for the debt, and potential strain on relationships. Furthermore, as the cosigner’s debt-to-income ratio rises, it may affect their borrowing ability.

External sources:

Ronald Johnson

RONALD JOHNSON, FINANCE WRITER AT BADCREDIFY

Ronald specializes in mortgages, personal loans, and small business financing. His articles cover topics such as homeownership, starting a business, and managing personal debt.