Co-Signer vs. Co-Borrower: What’s the Difference?

Securing approval for a new loan can be tough, especially if you're just starting to build your credit history or have an unconventional income. 

This is where the help of a co-signer or co-borrower comes in. Both can boost your chances of loan approval, but they do so in different ways. 

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What Is a Co-Signer?

The terms co-signer and co-borrower can sometimes be used interchangeably, but they are not the same thing. 

A co-signer is someone who provides additional credit support to a borrower, but they don’t have ownership rights or direct responsibility for the asset purchased with the loan. 

This means if you use a co-signer for a car loan, they do not own the car, nor can they sell the car from under you. 

They are still on the hook for repaying the loan if you don’t, though, meaning their credit score will take a hit if you have a late or missed payment. Because of this risk, some people might be wary about being added as a co-signer to a loan. 

Pros and cons of co-signers

Most of the risk lies with the co-signer, while the main borrower will reap the benefits of better loan approval odds and possibly a lower interest rate. 

A co-signer puts their credit score on the line by adding their name to someone’s loan. If you are an irresponsible borrower, their credit score can dramatically decrease. And if you stop paying altogether, they might be held accountable for repaying the loan. 

However, they don’t own the collateral of the loan or the loan itself, so they can’t sell it or refinance it to improve the situation. 

Co-signers willing to take on these risks are usually family members or close friends wanting to help out. 

Plus, if you are a responsible borrower, your on-time payments will actually boost their credit score. 

When should you choose a co-signer?

Co-signers are ideal for vehicle loans and personal loans. Having a co-signer gives your credit profile a boost since the lender sees you as a lower risk.

A good co-signer would be a family member or long-term friend with a better credit history than you, who also understands the financial risk they are taking on. 

READ MORE: How To Check Your Credit Score for Free

What Is a Co-Borrower?

A co-borrower is an equal partner in the loan agreement. 

Both borrowers are responsible for repaying the loan, and both parties have ownership rights to the asset purchased with the loan, such as a house or a car. 

Co-borrowers are typically used when both parties want shared ownership or when their combined income and credit profiles provide better loan terms.

Unlike a co-signer, if you use a co-borrower for a car loan and they sell it or trade it in, you won’t have any legal stand against them. You both own equal rights to the vehicle. 

RELATED: How Should Married Couples Split Finances?

Pros and cons of co-borrowers

Being a co-borrower rather than a co-signer is more advantageous since you share full ownership. If the other person is financially irresponsible, you can try to sell the asset or refinance the loan. 

But this comes at a risk for the main borrower since they’re sharing ownership of the item they’ve purchased. 

Be cautious before jumping into a co-ownership agreement with someone — especially since friendships or dating relationships can turn for the worst when financial strain is involved. 

Using a co-borrower could secure you better terms, especially if the other person has a higher income or credit score, but it can also be a messy situation if you miss a payment. 

RELATED: 4 Money Talks You Need To Have in a New Relationship

When should you choose a co-borrower?

Co-borrowers are more common for larger financial purchases, like a home or business venture. 

When both parties have aligned financial goals and are comfortable with shared responsibility, co-borrowing can be beneficial. 

It makes sense to be co-borrowers with a romantic partner on a new mortgage if you are engaged or married versus buying a home with a friend whose life and financial goals might change a few years after the purchase. 

FAQs

How do I know if I need a co-signer?

If you don’t meet a loan’s requirements because either your credit score or your income is too low, a co-signer can help. 

Additionally, if your credit history is still young, lenders might consider you too risky on your own. 

Do I need to worry about my credit score if I have a co-signer or co-borrower?

Even though a co-signer or co-borrower can help you significantly in increasing your loan approval odds, you still need to come to the table with the best credit score possible. 

This will help you secure a lower interest rate and be seen as less of a risk to the lender. 

What rights does a co-borrower have on a house?

In many cases, the co-borrower will be on the home’s title and loan. However, it’s possible for the co-borrower to be on the loan only, which means they will not have legal rights to sell the home. 

If you are the co-borrower, make sure you are on both the title and loan for your protection. 

TL;DR: Is Co-Signer or Co-Borrower Better?

Deciding between a co-signer and co-borrower depends on your financial situation, goals, and the nature of the asset being financed. 

Co-signers provide support without ownership, which is ideal for people with limited credit histories. 

The co-signer path is the one most people should take since it allows you to look better on the loan application without becoming entangled in a shared partnership of the car, home, or loan. 

For more tips on managing your money and your relationships, check out these episodes of the Erika Taught Me podcast:

• How To Set Your Kids Up Financially
• How To Become Better With Money
• The Psychology of Money

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