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

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

Co-signing and co-borrowing can both help you qualify for a loan, a larger loan amount or a lower interest rate. However, a co-signer is similar to a guarantor, in that they promise to repay the loan if you can’t. A co-borrower, sometimes called a joint applicant, borrows the money with you and shares equal responsibility in repaying the loan.

What is a Cosigner?

Cosigners are backup payers; they promise to repay a loan if the primary borrower cannot. In general, cosigners are used to help borrowers with poor credit or other deficiencies get approved for a loan. Instead of evaluating the borrower’s creditworthiness, the lender will primarily look at the cosigner’s creditworthiness and income. For example, parents will often co-sign on their child’s student loans to help him or her get approved and get a lower interest rate. In this scenario, the student may not have any credit history or income, so it would be difficult for him to borrow on his own. His parents, on the other hand, will have at least several years of credit history and annual income.

Typically, cosigners do not have an ownership interest in the property the loan is being used to purchase. With a mortgage, for instance, a cosigner will have no rights to the house, but she will not have to make any mortgage payments unless the primary borrower cannot. And if the borrower can’t repay or declares bankruptcy, the lender will turn to the cosigner for repayment on the debt. Moreover, a cosigner’s credit score can be impacted if the borrower doesn’t make payments.

What is a Co-Borrower/Joint Applicant?

A co-borrower, sometimes called a joint applicant, applies for the loan with the primary borrower and is equally responsible for repaying the loan. When you apply with a co-borrower, the lender will evaluate each person’s creditworthiness when making a decision, and your co-borrower will sign all of the loan documents with you. If one co-borrower declares bankruptcy, the other is usually afforded equal protection, meaning the other will likely not owe money on the debt. Many people opt to co-borrow with a partner or spouse as this allows them to qualify for a larger loan than either one could get on their own.

The most common example of co-borrowing is when a couple applies for a mortgage together. Each partner will assume responsibility in repaying the loan every month. Because each co-borrower is responsible for repaying the loan, each will have an ownership interest in the property. For a mortgage, this means that each co-borrower will have a stake in the home.

Cosigner vs. Co-borrower

The most common co-signing arrangement is when parents cosign on their child’s student loans. On the other hand, co-borrowing is normally used by couples who are purchasing a home or vehicle together. Other examples include someone cosigning for a personal loan or co-borrowing on a business loan.

Generally speaking, cosigning is used to help a borrower who would not normally qualify get approved for a loan. This may be because the borrower has poor or limited credit history, low income or too much debt. If everything goes smoothly, a cosigner will not have to make any payments on the loan and will have little to do with the loan itself. However, if things don’t, a cosigner will be on the hook for making payments.

Co-borrowing, on the other hand, is primarily used by couples or business partners to purchase property or other assets together. Both borrowers are equally responsible for repaying the loan. One advantage of co-borrowing is that the joint applicants are considered together, which means that you may be able to get a larger loan than if you applied by yourself. This is frequently used by couples to qualify for a larger mortgage.

Whether you are a co-borrower or cosigner, your creditworthiness can be affected by the loan. Not only will missed or late payments negatively impact your credit score, but the loan will increase your debt burden, potentially making it more difficult to get other loans. The main differences between the two are the ownership rights you have and bankruptcy protections. We recommend potential cosigners and co-borrowers think carefully before agreeing to the loan.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.