What is the Difference Between a Co-Signer and a Co-Borrower?
If you are interested in taking out a mortgage loan, a student loan, or a car loan, but you don’t quite qualify in the eyes of your bank or other lending institution, you might want to think about getting a co-signer or co-borrower for your loan.
Co-signer vs Co-Borrower
If you think you will need help getting a loan, or you can’t qualify for a loan on your own, you must decide whether to approach a friend or family member to be either a co-signer or a co-borrower. There is a difference between them. They don’t receive the same benefits if they are on your loan, but they may have the same responsibilities.
Co-signer. A co-signer is usually someone like a parent, family member, or spouse. A co-signer will not have an ownership interest in the property if they co-sign for your loan. The co-signer is simply guaranteeing you will pay back the loan and that if you don’t, she will. The person chosen for this role should be someone who trusts the borrower and who the borrower trusts since she will be responsible for paying the debt if the borrower defaults on the loan.
Co-Borrower. A co-borrower is someone who helps you get a loan and has an ownership interest in whatever your loan is for. That is the key difference between a co-borrower and a co-signer. If your loan is to buy a house, then the co-borrower has an ownership interest in that house. If the loan is to buy a car, then the co-borrower has an ownership interest in the car. Co-borrowers are usually partners or spouses. Sometimes, a co-borrower is a parent. If you have a co-borrower on your loan, that person’s income, assets, debt, and employment status are evaluated just like yours. If you are a first-time borrower, you often can’t get a mortgage loan without the strength of a co-borrower’s credit history and credit score to add to your own.
Examples of Co-Signing and Co-Borrowing
- You are going away to college. You’ve never lived away from home and you’re going to be living with one of your girlfriends in a rented apartment off campus. You have a part-time job, but you’ve never worked before. You’ve never had a credit card or a loan. You will probably need a co-signer in order to rent or lease an apartment because you have no credit history or credit score. You also do not have an employment history or any indication that you would pay your bills. Most landlords would require a co-signer to guarantee that your rent and utilities would be paid. Co-signing is the only appropriate choice in this case since you are renting instead of owning a place to live. No borrowed money is involved so there can be no co-borrower.
- You want to buy a used car. You are a single individual. You’ve had some credit in the past, but you had late payments and your credit score is low. In order to get either a personal loan or an auto loan, you must have a co-signer to guarantee either the bank or the car lot will get paid if you can’t pay back the loan. The co-signer guarantees the loan but doesn’t take ownership of any property. Co-signing is better than co-borrowing in this case because you are single and there is no one who would want to own the car with you.
- You are a first-time home buyer. You and your wife have just graduated from college and have a short credit history. You are working, but your wife has not found a job. The bank tells you that you don’t qualify to buy a home because of your income and credit history. In this case, a co-borrower is more appropriate than a co-signer and your father volunteers. His credit history and income will be considered and will enable you to buy your first home. Even though a co-signer would have guaranteed the loan, a co-signer’s income and credit history would not have been considered as part of your mortgage application.
Pros and Cons of Co-Signing vs Co-Borrowing
Pros of Co-Signing
- The benefit you get from helping a family member or a friend
Cons of Co-Signing
- The co-signed loan becomes a part of your credit history and your debt ratio
- You could be denied credit due to the co-signed loan.
- If the borrower stops making payments, the lender may try to collect from the co-signer before suing the borrower.
- The co-signer probably will not be able to claim the property if the borrower defaults.
- Only a co-borrower is an equal on the loan with equal rights to the property.
The Bottom Line
The key difference between co-signing and co-borrowing is that they entail the same responsibilities, but they don’t have the same benefits. Whether you are a co-signer or a co-borrower, you are guaranteeing a loan for someone else. That means it is your responsibility to repay that loan in the event the borrower defaults on the loan. You do not have the same benefits. A co-signer guarantees the loan without owning any part of the property they are guaranteeing which makes co-signing riskier. A co-borrower guarantees a loan but has an ownership interest in whatever asset is purchased with the loan. Only a co-signer can guarantee the payment of lease agreements and other rented items.
Consumer Financial Protection Bureau. "Why Might I Need a Co-signer in Order to Get Vehicle Financing?" Accessed Oct. 1, 2019
Consumer Financial Protection Bureau. "Making the Move to Homeownership on Your Own or with Someone Else," Accessed Oct. 1, 2019