A co-signer is a financial backup for the lender, and is only responsible for the loan if the primary borrower cannot make payments. But a co-applicant shares equal responsibility with the primary borrower.
Many people need help getting a loan. For example, 1 in 4 applications are denied for a refinancing loan.1 If you struggle to get auto loans or other installment loans, you may consider using a co-signer or co-applicant.
Below you will find everything you need to know about the advantages and disadvantages of both a co-signer and a co-applicant, as well as the responsibilities these roles entail.
What Is a Co-Signer?
A co-signer is someone who adds themselves to a loan to increase approval chances and loan amount for another person. The other person in this scenario will be the primary borrower. What does this mean exactly? Well, the primary borrower is the person who is responsible for making the monthly payments. If the primary borrower fails to repay the loan funds, the co-signer will be responsible for paying back the loan, with all its past due balances (not limited to principal and interest).
If someone asks you to be a co-signer, they likely have a bad credit history or no credit history, or not enough income to qualify for a specific loan amount.
An Example of a Co-Signer
A co-signer is usually an immediate family member like a sibling, parent, or spouse. To better understand the role of a co-signer, it may be helpful to see an example.
Let us say that you don’t have the best credit score but are trying to borrow a personal loan for $10,000. You go through the application process and are only approved for $3,000 because of your credit history. In that case, you may turn to a parent with better credit and higher income. You can apply again if they agree to co-sign for a loan. With their added credentials, your chances of getting that total of $10,000 and potentially a better interest rate increases!
Many loans have the option of adding a co-signer, such as student loans, auto loans, payday loans, title loans, and more.
Requirements To Be a Co-Signer
To be a co-signer, a person must be at least 18 years old, have a good credit score, and have some kind of income. On top of that, they need to fill out some information on a loan application and allow for a hard credit inquiry. And finally, they will need to agree to the terms and conditions of the loan to take on the role to be a co-signer.
Pros and Cons of Adding a Co-Signer or Becoming a Co-Signer Yourself
There are some important factors to consider when taking out a cosigner loan or becoming a co-signer yourself. Here are some pros and cons:
Pros of Adding a Co-Signer
- Adding a co-signer can help you get a loan with no credit or poor credit, help you get a higher loan amount, and get more affordable loan repayment.
- Adding a co-signer can help you improve your FICO score (as long as you make your monthly payments on time).
- Asking someone to be a co-signer is less demanding and awkward than asking them to borrow money.
Pros of Being a Co-Signer
- Being a co-signer can also improve your credit if the primary borrower makes their payments on time.
- By co-signing on a loan, you can really help someone build their finances.
Cons of Adding a Co-Signer
- If you have a co-signer on a loan and cannot make regular payments, you can ruin your co-signer’s credit score.
- Co-signing may harm your relationship with a close friend or family member.
Cons of Becoming a Co-Signer
- Becoming a co-signer comes with a lot of legal responsibility, which includes all loan charges if they cannot be paid.
- As a co-signer, any missed payments from the primary borrower will hurt your credit score.
What Is a Co-Applicant?
A co-applicant, also called a co-borrower, is responsible for monthly payments on a loan just as much as the other party involved. Loans with more than one co-borrower can also be called joint loans or joint credit. Applying for joint credit means you will have a shared credit account.
Just like a co-signer, a co-applicant will be responsible for paying back the entirety of the loan if the primary borrower fails to keep making payments. Most of the time, co-applicants are involved if both parties have an ownership interest for an asset or if there is a higher income requirement.
Examples of a Co-Applicant
Most of the time, a co-applicant will be a spouse, other family member, or business partner with whom you share finances or are planning to share an asset. Usually, mortgages will have co-applicants.
For example, let’s say you want to buy a home and are currently renting with a significant other. If you plan to live together, your significant other will likely join the mortgage loan as a co-applicant.
As a co-applicant, their credit score and income will be looked at, and they will be subject to the same application process and loan documents as you. Additionally, they will get the benefit of co-owning the house! Sometimes with a mortgage, one co-applicant’s income may not be used for strategic reasons, but they will still be considered a primary applicant on the loan, with all the responsibilities.
Another typical example of having a co-applicant is if you are a business partner. If both co-borrowers own the business, they may want to equally split the cost of a business loan or personal loan option to pay for running or expanding the business.
Requirements To Be a Co-Applicant
To be a co-applicant, you may have to have a good credit history and some sort of income, depending on the loan and lender. The good thing about co-borrowing is that lenders may be more flexible with a loan’s qualification and amount. This is because more than one person is responsible for repaying the loan. Like most loans, you will need to be at least 18 years old to qualify, and you may have to live in the same state for which you are applying for a loan.
Pros and Cons of Adding a Co-Applicant Onto Your Loan or Becoming a Co-Applicant Yourself
Like being a co-signer, you should know about the pros and cons of being a co-borrower before signing up for a joint loan or asking another person to be a co-borrower.
Pros
- Adding a co-borrower to a loan can get you more favorable loan terms, such as lower interest rates and a higher loan amount.
- Being a co-borrower on a joint loan can make it easier to make regular payments.
- You don’t need excellent credit to be a co-borrower on a loan.
Cons
- With a joint loan, you are taking on full and equal responsibility for the loan. And so, if the other party cannot pay, you will have to cover their portion of the loan payments.
- If anyone misses a payment, it will impact the other co-borrower’s credit score.
- Things can get complicated between two people when they co-own an asset, such as a home.
- Even if you make on-time payments, but the other co-applicant does not, you could both lose that asset, regardless of your good financial habits. With co-signing, the primary borrower will have sole ownership of an asset.
- You will have to refinance if you want to remove a co-borrower from a loan.
A Comparison of Co-Applicants and Co-Signers
The main difference between a co-borrower vs. a co-signer is that a co-signer is not considered the primary borrower. And therefore, a lender will not require a co-signer to make monthly payments on a loan, unless the primary borrower cannot.
A co-borrower is someone who pays back a loan with another person. When they sign up to co-borrow, they sign up to take on joint responsibility for monthly payments. If one borrower cannot pay the other must cover the full payment.
There are some simple requirements to be either a co-signer or co-borrower that you should know about. Lenders have age requirements, credit scores, and income minimums. There are also pros and cons to consider when adding a co-borrower or co-signer to a loan or deciding to take on that role for someone else.
Tips For Using a Co-Signer or Co-Borrower on a Loan
Here are some helpful tips to keep in mind when considering using a co-signer or co-applicant to get installment loans.
| Aspect | Tips for Using a Co-signer | Tips for Using a Co-borrower |
| Selection | Choose a co-signer with a strong credit score and stable income as they can help increase the likelihood of approval. | Opt for a co-borrower with whom you have a close, trustworthy relationship since you’ll share equal responsibility. |
| Communication | Keep your co-signer informed about the loan’s status and ensure they understand their obligations. | Maintain open and honest communication with your co-borrower, especially about finances and loan repayment. |
| Agreement | Ensure the co-signer understands they’re responsible for the loan if the primary borrower cannot repay. | Both borrowers should agree on the terms of the loan and understand their shared responsibilities. |
| Credit Scores | Both parties should monitor their credit scores, as the loan will affect both the borrower and co-signer. | Co-borrowers should keep track of their credit scores, as joint activities will impact both parties. |
| Loan Repayment | Set up a formal agreement about repayment responsibilities to prevent misunderstandings. | Discuss and agree on a strategy for repayment, considering if one party is unable to contribute at some point. |
| Financial Planning | Discuss the impact of the loan on future financial planning, including potential effects on the co-signer. | Co-borrowers should integrate the loan into their broader financial planning, considering both parties’ budgets. |
| Legal Advice | Consider consulting a financial advisor or legal professional to understand all implications fully. | It’s wise for co-borrowers to seek independent legal advice to understand their rights and responsibilities. |
| Exit Strategy | Understand the conditions under which a co-signer can be removed from the loan, if possible. | Discuss and plan for scenarios like selling a jointly-owned asset or refinancing the loan independently. |
Frequently Asked Questions About Being/Using a Co-Signer or a Co-Applicant
When you’re the primary borrower, adding a co-signer with a strong credit score and stable income can significantly increase your chances of approval. This is because the lender takes into account their income and credit history, providing more assurance that the loan will be repaid.
Absolutely! When you apply with a co-borrower, both incomes, credit scores, and financial stability are considered. This can often lead to more favorable terms, such as a lower interest rate or a higher loan amount, especially if both co-borrowers have strong credit profiles.
If a primary borrower defaults, or stops making payments, the responsibility typically falls to the co-signer or co-borrower. They’ll be expected to continue making payments to ensure the loan doesn’t go into default, protecting both parties’ credit scores.
In most auto loans, co-borrowers are considered co-owners of the vehicle. Both names will be on the car title. That means that both car loan borrowers have equal ownership and responsibility of the vehicle.
It depends on your loan agreement. Some loans include a co-signer release option, where after a certain number of on-time payments, you can request to remove the co-signer from the loan. This often requires a review of your improved credit and financial stability.
As a co-signer, the loan appears on your credit report. If the primary borrower makes timely payments, it could have a positive impact. However, if they miss payments, your credit score could be negatively affected.
Lenders typically allow only one co-signer per application, but certain types of loans, like mortgages, may allow for multiple co-borrowers. However, this can complicate the loan repayment process and requires all parties to have good communication.
Lenders will typically require the same information from co-signers as primary borrowers. This includes details on income, employment, debts, assets, and full permission to check their credit report.
Both co-signers and co-borrowers have a legal obligation to repay the loan. However, co-signers don’t have ownership rights in the asset purchased with the loan, whereas co-borrowers often do.
Yes, a co-signer can help. If you have a lower income, a co-signer with a strong financial background can compensate for that, increasing the lender’s confidence in offering approval.
A Note From CreditNinja on Co-Applicants and Co-Signers
You may think that you have to apply with a friend or family member to qualify for loan funds, but there are alternative options. At CreditNinja, we consider more than just your credit, so you may not need a perfect score to be eligible for a personal loan on your own! Apply online today to see why we have so many satisfied customer reviews.
References:
Large numbers of loan applications get denied │ Washington Post
