Cosigning and co-borrowing a loan both involve someone taking legal responsibility to pay back a debt. But the two are typically used in very different situations. A cosigner is someone who signs a loan alongside someone else, agreeing to pay back the loan if the primary borrower can’t. A co-borrower is someone who signs a loan with another individual so the two can borrow money together. Two people might co-borrow a loan together when buying an asset jointly, such as a couple purchasing a home together. Cosigner and co-borrower are two different roles but result in similar legal responsibilities.
What is a cosigner?
A cosigner is someone who guarantees a loan on behalf of the primary borrower. By cosigning a loan, the individual agrees to pay back the debt if the borrower cannot or does not pay.
People generally need a cosigner on a loan if they don’t have sufficient credit to qualify on their own. It could be the case that a personal loan applicant has income or a credit score that doesn’t meet the lender’s requirements. They could ask someone to cosign the loan for them and the cosigner agrees to cover the loan payments if they can’t.
To qualify as a cosigner, someone must generally have a good credit score and a consistent source of income. Even though they aren’t the primary borrower, cosigners could face serious ramifications if the borrower doesn’t make their payments. They might see their credit scores drop or receive calls from collection agencies.
[ Read: Should You Co-Sign a Loan? ]
What is a co-borrower?
A co-borrower, also known as a co-applicant, is someone who applies for a loan with another person. Unlike in the case of a cosigner, both co-borrowers generally benefit from the loan. For example, a married couple might be co-borrowers on a loan when they buy a home or a car.
When two people co-borrow a loan, the lender takes both of their information into consideration when determining whether to give the loan and at what rate to do so. A co-borrower with good excellent credit may be able to offset a co-borrower with bad credit. When the co-borrowers both have excellent credit, they’ll be eligible for the best loan terms.
Both co-borrowers of a loan are equally responsible for paying it back. Just like in the situation of a cosigner, the lender can come after either party to collect their money and both parties could see their credit scores suffer if they don’t pay off the loan.
Cosigners vs. co-borrowers
Similarities between cosigners and co-borrowers
While cosigning and co-borrowing a loan aren’t exactly the same thing, they do have some strong similarities. First, lenders take both parties’ information into account when deciding whether to grant the loan. When two people co-borrow a loan, they both fill out the application. The lender runs both credit scores and considers both borrower’s income. In the case of cosigning a loan, the primary borrower might apply on their own first, only to find out they don’t meet the lender’s requirements. Then the lender can take the cosigner’s finances into consideration to decide whether to grant the loan.
Another similarity between cosigning and co-borrowing a loan is that both parties are responsible for paying back the loan. Loan cosigners might expect that the primary borrower will make the payments. But if they don’t, the cosigner is equally responsible.
Differences between cosigners and co-borrowers
While cosigners and co-borrowers both have responsibility for the loan, there are some key differences between the two. First, cosigners generally don’t benefit from the loan. While their name is on the paperwork, they have no legal claim to the money. But in the case of co-borrowing a loan, both parties benefit.
Another difference between the two is the expectation of payment. While a cosigner is responsible for paying a loan if the primary borrower doesn’t, the assumption is that the primary borrower will make the payments. A cosigner may not get a monthly bill or payment reminders.
Finally, there may be a process for the cosigner to be released from a loan. Some lenders agree to remove a cosigner after the primary borrower has made a certain number of on-time payments. But in the case of co-borrowing a loan, the payment remains the responsibility of both parties.
When is a cosigner the best option?
Cosigning a loan is best for a situation where one person wants to borrow money, but doesn’t have the necessary income or credit score to do so. In that case, they may wish to have someone cosign the loan. The cosigner should have adequate income and credit for the lender to approve the loan.
The reason the primary borrower may want a cosigner instead of a co-borrower is that a cosigner doesn’t benefit from the loan. The cosigner has no legal claim to the money. The primary borrower doesn’t have to worry about any expectation of sharing the money from the loan.
A common situation where someone might cosign a loan is a parent cosigning a private student loan for their child. While people often need student loans to pay for their education, many 18-year-old borrowers don’t have the necessary income or credit to qualify on their own. As a result, many students ask their parents to cosign. The parent doesn’t receive any of the money, but they agree to make the payments if their child cannot.
Cosigners should only agree to cosign a loan when they are very confident that the primary borrower will make the monthly payments. Alternatively, they may still cosign if they know the borrower may struggle to make payments but don’t mind stepping in to help if the situation warrants it.
When is co-borrowing the best option?
Co-borrowing a loan is the best option when the two parties will benefit from the money and are taking out the loan for a joint purpose. Perhaps the most common use of a joint loan is when a couple co-borrow a loan for purposes of buying a home, car or financing home improvement projects.Both parties are listed on the loan, just like both will appear as owners of the item they plan to buy.
Another time when parties might co-borrow a loan is when two partners need a business loan to start their company. The two parties would share equal benefit and responsibility for the loan, just as they share the benefit and responsibility within the business.
Co-borrowing a loan makes more sense than cosigning when both parties plan to pay off the loan together. In general, cosigners only make payments on a debt if the primary borrower can’t. But when two parties co-borrow a loan, it is generally with the expectation that they’ll pay it back together.
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