Co-borrower vs. cosigner: What’s the difference?

When you apply for a loan you might have the option to add a co-signer or co-borrower. Both could increase your chances of approval and could help you secure better terms.

While there are some similarities, a co-borrower — or joint applicant — shares ownership of the funds or assets secured with the loan. The co-signer, on the other hand, does not. Knowing the difference between the two is imperative when applying for a loan, to avoid future misunderstandings.

What are the differences between a co-signer and a co-borrower?

The most important difference between a co-borrower and a co-signer is the degree of investment in the loan. A co-borrower has more ownership than a co-signer because a co-borrower has access to the loan funds.

Co-signers

A co-signer agrees to take equal responsibility for repaying a loan, though is typically not expected to make payments unless the primary borrower misses a payment. The co-signer typically has better credit or a higher income than the primary borrower, who might otherwise not get a loan application approved without the help of a co-signer.

Co-signers typically have a close relationship with the primary borrower. A co-signer is typically a parent, immediate family member, a partner or spouse.

How it works

A co-signer is a guarantor for the primary borrower. Co-signers promise to assume responsibility for repayment if the primary borrower defaults on the loan.

Pros and cons of a co-signer

Pros

• Can increase the primary borrower's approval odds.
• It could help the borrower secure a lower interest rate.
• On-time payments could boost both credit scores.
• The primary borrower is the sole owner of the funds.

Cons

• Must have good credit.
• Both credit scores could suffer if the borrower pays late.
• Legally responsible for repayment.
• Damaged relationship if the loan isn't handled responsibly.

Who a co-signer is best for

Co-signing is typically preferable if only one of the borrowers will benefit from the loan. For example, if a young person without established credit wants a personal loan, the bank might decide that the loan is too risky without a co-signer. A parent with good credit might agree to co-sign with the understanding that their child will pay it back.

Co-borrowers

A co-borrower, sometimes called a co-applicant or joint applicant, is a person who shares both ownership and responsibility for repaying a loan with another person. Applying for a loan with a co-borrower reassures the lender that multiple sources of income can go toward repayment.

Applicants with co-borrowers are more likely to receive larger loan amounts since they are viewed as less risky for lenders.

How it works

In addition to both parties being responsible for making payments toward the loan, assets that guarantee the loan — like a home or car — may be owned by both co-borrowers. Each co-borrower has equal access to the loan funds. And if the loan was used to secure property — like a vehicle — often both co-borrowers will be listed as owners.

Pros and cons of a co-borrower

Pros

• It can make it easier to qualify.
• Can boost eligibility for a better rate and larger amount.
• Shared responsibility for repayments.
• Shared ownership of the funds or assets.

Cons

• Hard credit inquiries can cause a temporary dip in both credit scores.
• Risk of making payments on your own if the other person is unable to help.
• Both credit scores could suffer if the loan isn't paid on time.
• Damaged relationships could result in a legal battle over the funds or assets.

Who a co-borrower is best for

Co-borrowing is typically preferable if both borrowers will benefit from the loan. For example, if two people start a business together, they might take out a small business loan as co-borrowers and work on paying it back together. Both directly benefit from borrowing and enter the transaction knowing that they will each be making payments.

How to choose between a co-signer or co-borrower

The right approach depends on what your goals are for the loan. Consider these factors when choosing between a co-signer and a co-borrower.

Co-signers

A co-signer won’t have to put up collateral or accept responsibility for regular payments. If the primary borrower makes on-time payments, the co-signer will never have to worry about the loan. They could also benefit from an improved credit score.

On the flip side, if the primary borrower defaults, the co-signer will be on the hook for payments. Plus, they won’t be able to use the loan funds and might have difficulty getting approved for other loans since it still counts toward their total debt-to-income ratio (DTI).

Co-borrowers

A co-borrower benefits from the loan directly. Lenders may also offer lower interest rates and higher loan amounts, especially if both borrowers have good credit. And since each borrower has equal responsibility, you may not need to provide additional collateral to secure the loan.

What should I do before co-borrowing or cosigning?

Before co-borrowing or co-signing a loan application, have an open conversation with the other person. Determine if the loan is necessary, consider other options and discuss each person’s financial picture and future goals.

Because both options have considerable financial risk, you should consider a contract that outlines how responsibility will be split and what happens in worst-case financial situations. It is also useful to research your state’s co-borrower and co-signer rights. There may be protections around property ownership and how credit is impacted.

If you’re trying to decide between being a co-borrower or a co-signer, think of how much involvement you want to have. For instance, if you’re interested in accessing the funds or owning part of the asset being financed, then co-borrowing may be the best option. However, if you just want to help the other person secure the loan and don’t mind being held accountable for payments, then co-signing may be the better choice.

Bottom line

Ask yourself a few questions before applying for a loan with someone else:

• Can you afford to make payments toward the loan?
• How stable is your source of income?
• How will co-signing or co-borrowing affect your future goals?
• What are the financial habits of the co-applicant or primary borrower?

Co-borrowing might make sense if you know the risks and want to borrow money with someone to accomplish a common goal. Alternatively, co-signing might be right for you if you want to help out someone you trust.