Cosigner vs. Co-borrower: What’s the Difference?

Are you wondering the difference between a cosigner vs. co-borrower? Before considering another person to step into these roles or fulfill them yourself, it will be essential to know what they each mean. Below you will find more details on the similarities and differences of each type of financial role.

What Role Does a Cosigner Play?

Regardless of why you may have bad credit, adding a cosigner can 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 of 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 build your credit that will be helpful to secure loans in the future and build financial independence. For those without a cosigner who need emergency cash, a bad credit loan could be the solution you need

What Will a Cosigner Be Responsible For?

After a cosigner adds themselves onto 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 cosigner 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 cosigner can be a family member, spouse, co-worker, or friend.

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

When signing up or adding either a cosigner or co-borrower, 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.

When You Are a Co-borrower, and the Other Borrower Cannot Repay the Loan, You Will Be Responsible for Repayment.

Co-borrowers both assume legal responsibility to repay the loan funds. Suppose one of the applicants cannot make payments or defaults on a loan. In that case, the responsibility may fall onto the other co-borrower.

The Impact on Your Debt-to-Income Ratio

If you consider becoming a cosigner or co-borrower, think about how another loan will impact your debt-to-income 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 and be aware of it before adding yourself to another loan. This impact may be apparent as a co-applicant. However, it may not be clear for cosigners that another loan is added to their credit report—even though through cosigning it is. And so, keep that in mind when signing up for either of these roles.

Repayment Can Impact Your Credit Score!

Whether you are a co-borrower or cosigner, repayments on the loan can impact your credit score. And so if the other party misses any payments, has late payments, or defaults on the loan, it will negatively impact your credit score.

The Bottom Line 

Understanding the difference between a co-borrower vs. a cosigner is crucial if you are signing up for one of these roles or are asking someone else to fulfill them. Co borrowers both assume responsibility for monthly payments. In comparison, a cosigner only needs to worry about making payments if the primary borrower fails to do so. 

Co-borrowing and co-signing both can allow borrowers with subprime credit scores to get qualified to borrow money, help get a lower interest rate, and help them get a larger loan amount. Co-borrowing is usually done with mortgage lenders and auto loans. In contrast, cosigners are more likely to be added to loan options such as private student loans and personal loans.

Before cosigning or co-borrowing, it will be essential to understand the risks associated with both financial roles!