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Co signer vs co borrower

cosigner, co-signer, co-borrower

Are you wondering the difference between a cosigner vs. co-borrower? Co-signing or co-borrowing could help you get loan approval. Sadly, about 53% of Americans are turned down due to bad credit.

But before applying for funding with another person, it’s essential to know what each term means. Below you will find more details on the similarities and differences between a co-borrower vs co-signer.

A Brief Overview of Co-Signers, Co-Borrowers, and Co-Applicants

Before reading in-depth explanations of each type of financial term, it’s essential to first learn the basics.

CriteriaCo-BorrowerCo-SignerCo-Applicant
ResponsibilityShares equal responsibility for loanActs as a backup for loan repaymentDoes not contribute unless the main borrower defaults
Monthly PaymentsUsually contributes to paymentsDoes not contribute unless main borrower defaultsNo asset risk unless the main borrower defaults
Credit Score ImpactAffected by payment historyAffected only if the main borrower defaultsAffected if payment history is shared
Ownership RightsUsually has equal ownership of assetsGenerally no ownership rightsAssets may be at risk if a default occurs
Loan Approval ImpactCan improve chances and termsCan improve chances of approvalCan improve chances of approval
Asset RiskAssets may be at risk in defaultNo asset risk unless main borrower defaultsAssets may be at risk if default occurs

What Role Does a Cosigner Play?

You may ask yourself, “What is bad credit, and why do I have it?” But even though your credit is poor, adding a cosigner may help you secure a loan! Cosigners can be anyone you know—who has good credit— and is willing to take on the responsibility of paying back the loan if you can’t. 

A cosigner can help with a few loan factors and overall approval:

  • Get Approval From a Lender — If you don’t have an established credit history or your credit score needs improvement, adding a cosigner increases your chances for approval. Cosigners should have better credit than the primary borrower. 
  • Get a Larger Loan Amount — In some cases, you will need to have a certain amount of income if you are looking for a large loan amount. Adding a cosigner can help you secure a larger loan amount, as adding another source of income can mean enough income to qualify.
  • For Better Interest Rates and Repayment Terms — Bad credit loans are available for less-than-perfect credit scores. However, the interest rates and repayment terms may be less than ideal. Adding a cosigner can help curb that impact on your credit score to get more favorable interest rates and repayment terms.

For those who don’t have a cosigner, there are ways to improve and rebuild credit that will be helpful to secure loans in the future and build financial independence. For those without a cosigner who need emergency cash, bad credit loans could be the solution. 

What Will a CoSigner Be Responsible For?

After a co-signer adds themselves to a loan, they will be responsible for loan repayment if the primary borrower cannot repay it or defaults on it. This repayment will include any fees incurred during loan repayment and any other outstanding balances.

A co-signer will not be responsible for making any payments while the primary borrower does so. Instead, they play the role of a backup source for repayment to the lender if the primary borrower does not or cannot repay the loan. A co-signer can be a family member, spouse, co-worker, or friend.

What Exactly Is a Co-Borrower?

A co-borrower is another person on a loan contract. They carry just as much legal responsibility as the other borrower. People add a co-borrower for similar reasons that they add a cosigner; larger loan amounts, increase of chances for approval, and better interest rates. Adding a co-borrower can increase opportunities for getting these perks, as multiple borrowers will be repaying the loan simultaneously.

What Will a Co-Borrower Be Responsible For?

It is imperative to understand the responsibilities of being a co-borrower, whether you are thinking of becoming one or asking someone else.

A co-borrower will have to make loan payments with the other borrower or borrowers. In the scenario of co-borrowing, all parties involved will be considered primary borrowers.

If the other borrower defaults, the co-borrower will be responsible for repayment. In most cases, co-borrowers will be involved with loans that include assets such as a mortgage loan or an auto loan. When an asset is involved, all participating borrowers will have equal ownership. And so, it shouldn’t be too surprising that most co-borrowers are either a spouse, family member, or someone you are sharing finances with.

What Is a Co-Applicant?

Co-applicants are similar to co-borrowers but are more commonly referred to during the application phase. In the context of an auto loan, a co-borrower usually has equal ownership rights to the vehicle, unlike a co-signer who has no ownership rights but is still financially liable if the primary borrower defaults.

What Do I Need To Consider Before Adding or Becoming a Cosigner vs. Co-borrower?

When signing up or adding another person to a loan agreement, you need to understand the impact it can have on your finances, credit score, and credit history:

When a Primary Borrower Cannot Repay the Loan, the Cosigner needs to Repay! 

Let’s say that you become a cosigner for a loan, and the primary borrower defaults. In that scenario, you, the cosigner, will have to repay the loan’s remaining balance. And so, before you add a cosigner to your loan, or become one for someone else, make sure you are willing to take on that risk.

You May Be Responsible for Repayment

Secondary applicants assume legal responsibility to repay the loan funds. Suppose one of the co-borrowing applicants cannot make payments, and they default on the loan. In that case, the financial responsibility may fall onto the other co-borrower.

Having to pay the remaining balance of a loan, such as an auto loan, that you did not want can ruin relationships and your financial plans. Suppose you have savings and plan to use that money for your upcoming wedding expenses. If the main co-borrower, co-applicant, or co-signer cannot keep making monthly payments, then you must pay off the auto loan. Failure to continue to make those auto loan payments can result in further financial issues.  

The Impact on Your Credit Score

Whether you are a co-borrower or cosigner, repayments on the loan can impact your credit score. Credit scores can affect more than one’s ability to get new credit. A good credit score gives you access to premium credit cards, better loan products, and more favorable interest rates.2 But a bad credit score can negatively impact someone’s life. 

Credit scores are affected by these 5 financial factors:

Payment History – 35%

A person’s payment history is the most important factor that affects their FICO score. Timely payments will positively impact the credit scores of both the primary borrower and co-borrower or co-signer. Conversely, missed or late monthly payments will negatively affect the credit scores of all parties involved. A late or missed payment can result in delinquency, and these types of delinquencies stay on a credit report for seven years. 

Total Debt – 30%

If you consider helping someone get money for a dental procedure, think about how another personal loan will impact your debt-to-income (DTI) ratio. This ratio affects your credit score, and adding another loan can change it—sometimes not favorably. And so, it will be helpful to calculate your debt-to-income ratio before adding yourself to another loan. 

If you want to manually calculate your DTI ratio, follow these 5 steps:

  1. Add up your total monthly expenses (housing, monthly debt payments, etc.) 
  2. Determine your gross monthly income (income after taxes).
  3. Divide your total monthly expenses by your income.
  4. Transform your decimal answer into a percentage.
  5. Get your DTI ratio!

Length of Credit History – 15%

The length of your credit history can benefit or negatively impact a credit score. A long financial history can help you look more responsible to lenders, while a thin credit file may be seen as a sign of potential credit risk. 

It’s in your best interest to avoid closing any accounts, even if you don’t use them. Accounts that are kept in good standing for a long time can benefit your credit rating. But keep in mind that some creditors close accounts if they are inactive for months or years. Contact your credit card issuer to avoid an unexpected account closure. 

New Credit Inquiries – 10%

Every credit inquiry you make can decrease your credit score and appear on your credit report. Making multiple credit inquiries within a short period can greatly drop your credit rating and impact your eligibility for loans in the future. When too many inquiries appear on a credit report, a lender may infer that the applicant cannot manage their finances. To avoid applying with too many lenders when you are looking for loans, inquire to see if you pre-qualify before submitting a loan application.  

Credit Mix – 10%

Having a mix of installment loans and revolving credit accounts may boost your credit. Managing more than one type of account can help you appear more financially capable during the loan approval process. But do not open new accounts solely to try and boost your credit. Taking on more unnecessary debt can damage rather than help your credit. 

Frequently Asked Questions About Co-Signers and Co-Borrowers

What are the disadvantages and risks of being a co-signer or co-borrower?

One of the main disadvantages of both roles is the risk to your credit history. If the primary borrower misses payments or defaults, it can negatively affect your credit score. For co-borrowers, there’s also the aspect of equal responsibility, meaning you’re equally liable for the loan repayment. As a co-signer, you’re the backup, but if called upon, you must fulfill the loan obligations, which can be financially taxing.

What are the legal and financial implications if the borrower or co-signer becomes incapacitated or dies?

If the primary borrower becomes incapacitated or dies, the secondary borrower is generally responsible for continuing loan payments. Legal implications can vary, but generally, the debt does not get erased. It’s crucial to understand your obligations and consult a legal advisor for your specific situation.

What qualifications do I need to be a co-signer or co-borrower, and can I be released from a personal loan?

Qualifications often include a stable income and a good credit history. Lenders look for reliability and the ability to pay back the loan. Being released from a personal loan as a secondary borrower is generally difficult and depends on the lender’s policies. Some lenders may allow it if the primary borrower demonstrates improved financial stability.

What rights and financial responsibilities do co-signers and co-borrowers have?

Co-borrowers usually have equal ownership rights to any assets bought with the loan and share equal responsibility for repayments. Co-signers don’t typically have ownership rights but are responsible for the loan if the primary borrower fails to uphold the terms of their loan agreement. Both parties are responsible for any interest payments accrued on the loan.

Where can I find a co-signer or co-borrower, and how can I get more information?

You can ask trusted family members or friends to help you get funding. Financial advisors and online platforms can also provide more information. Always make sure both parties are fully aware of their responsibilities before proceeding with loan approval.

How can I protect myself financially if I decide to be a co-signer or co-borrower?

Always read the loan agreement carefully and consider seeking legal advice. Keep copies of all documents and set up a communication plan with the primary borrower to stay updated on the loan status. This can help protect you if the primary borrower misses payments or defaults.

What CreditNinja Wants You to Know About Co-Signers and Co-Borrowers

If a person has difficulty getting loan approval due to a bad credit score, they may consider applying with a co-borrower or co-signer. But which is better, between a co-borrower vs co-signer? At CreditNinja, we think it’s critical that consumers know how certain actions can affect their personal finance and credit history. 

A co-borrower generally shares financial responsibility of the loan, while a co-signer and co-applicant usually act as financial backups in case the main borrower falls behind on payments. If you are thinking of helping someone get a loan or asking someone to help you get a loan, it’s critical to know what signing a loan agreement means. 

Check out the CreditNinja online blog to read more about your loan options, what you can expect from the approval process, and things like how to remove a co borrower from a loan. Remember that no matter how low your FICO score is, there are steps you can take to improve it!  

References:

  1. 53% of Americans Turned Down Due to Bad Credit │ Cision
  2. These are the biggest disadvantages of having a bad credit score │ CNBC
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