Co-Borrower Vs. Co-Signer: Which Should You Use On Your Loan?
Although it’s common to be the only borrower on a loan application, there are instances where you may want to add a second person. You can either add a co-signer or co-borrower. While a co-signer can help you qualify for a loan, a co-borrower is an equal participant in the repayment process. Choosing between the two comes down to your personal circumstances.
We’ll walk you through what you need to know to make a sound decision.
What Is a Co-borrower?
A co-borrower is someone who applies for a loan or line of credit with another borrower. The co-borrower has equal access to the funds tied to the loan. Both the co-borrower and primary borrower are responsible for payments. Some lenders refer to these parties as loan co-applicants.
A common example of this is a married couple that applies for a mortgage or auto loan together. Both of them will share the responsibility of monthly payments and have access to the assets attached to the loan.
How a Co-borrower Loan Works
Let’s say you and your spouse want to buy a house together. You both want an equal claim on the property and equal responsibility for the mortgage. When you apply for the mortgage, you are listed as co-borrowers.
In this case, the lender will examine both of your incomes, credit scores, assets and other debts to qualify your application. Often, having two incomes will help you qualify for a higher loan limit or better terms. If you or your spouse has a low qualifying credit score or a high debt-to-income (DTI) ratio, you may receive a higher interest rate than if you applied individually.
Three primary credit bureaus—Experian, Equifax and TransUnion— produce credit reports that help determine your credit score; the two main scores are FICO and VantageScore. In the case of a joint application, lenders use both applicants’ scores but typically rely more heavily on the lower average of the two scores to determine the terms. This is why a co-borrower with low qualifying credit scores can harm your application.
What Is a Co-signer?
Borrowers who have poor credit or a short credit history often need a co-signer to qualify for a loan or receive lower interest rates. An individual who co-signs a loan agrees to take financial and legal responsibility for the loan in case the original borrower stops making payments or defaults.
The co-signer must have a good credit score, stable employment and enough income to cover the cost of the loan. The co-signer does not have to be a direct relative; it can be a friend, co-worker or spouse.
Private student loans often require co-signers because students typically don’t have a credit history or any income. Landlords also often require a co-signer for tenants who don’t have a credit history. Consumers who are self-employed and who don’t have multiple years of self-employment history may also need a co-signer.
How a Co-signer Loan Works
Using a co-signer on your loan application is similar to the normal loan process. If you’re the primary borrower, you will provide your personal information, including Social Security number (SSN), pay stubs, tax returns and an employment verification letter.
The lender will ask for the co-signer’s SSN to run a credit check and calculate their DTI ratio. They may also ask for a pay stub or tax return to verify the co-signer’s income.
Once approved, the loan will appear on both the primary borrower’s and co-signer’s credit report. This means if the primary borrower misses a payment or defaults on the loan, it can hurt the co-signer’s credit score and ability to qualify for future loans, along with their own.
Pros & Cons of Using a Co-borrower vs. Co-signer
Not sure which option is best for you? Here are the benefits and drawbacks to co-borrowing and co-signing.
Pros of Using a Co-borrower
- You may qualify for a lower interest rate
- You can receive a higher loan limit
Cons of Using a Co-borrower
- You can potentially damage the co-borrower’s credit score if you fall behind on payment
- Both borrowers are responsible for the monthly payments; if you get divorced, you’re still both on the hook for the loan
Pros of Using a Co-signer
- You can qualify for a loan or lower interest rate
- You are the sole owner of the asset tied to the loan
Cons of Using a Co-signer
- You are fully responsible for the payments
- You can damage the co-signer’s credit history if you fall behind on payments, along with your own
When Is Co-borrowing or Co-signing the Right Option?
Co-borrowing is best for people, such as spouses, who want to share the responsibility of the loan payments and access to the assets tied to the loan. On the other hand, co-signing is best for a borrower who doesn’t meet a lender’s qualification requirements and needs help qualifying for a loan or lower interest rate.