Co-Borrower vs. Co-Signer: What Are the Differences?

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 8th Apr 2022
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If you can’t get a loan on your own, you might think about a co-borrower or co-signer. While they sound identical, there are some differences you should understand before taking on the loan. If you’re the co-borrower or co-signer, understand what you’re getting yourself into and what the worst-case scenario would be if the borrower could no longer afford the loan.

What Is a Co-Borrower?

A co-borrower is someone that goes on the loan with you intentionally. For example, a husband and wife that buy a home typically go on the mortgage together because they both live in the home. Similarly, a wife and husband can apply for a personal loan together.

A co-borrower typically has something to gain from the loan, such as a house to live in or a car to drive. Most co-borrowers take on the loan, intending to repay it themselves. They aren’t the ‘backup’ if the borrower doesn’t make their payments. Both the borrower and co-borrower intentionally enter the loan agreement.

How Does Co-Borrowing a Loan Work?

When you are a co-borrower, you apply for the loan with the borrower. You both complete the loan application and let the lender pull your credit and evaluate your current income, assets, and debts to evaluate your risk of default.

Co-borrowers are on the loan, and if it’s a home, they are also on the home’s title. A borrower and co-borrower are equally responsible for the loan repayment. If the loan doesn’t get paid, it can hurt both the borrower’s and co-borrower’s credit.

Watch out, though. When you have a co-borrower who has worse credit than you or a lot of debt, it could hurt your chances of approval. Lenders use all information from both borrowers to determine whether you qualify.

>> More: Best Personal Loans

Understanding Co-Signing a Loan

A co-signer is someone you ask to be on your loan if you can’t qualify on your own. If your credit score is too low or your debt-to-income ratio is too high, and you’re at risk of denial, a co-signer may help your chances of approval.

A co-signer typically doesn’t benefit from the asset that underlies the loan. For example, they may not live in your home or drive the car you’re buying. Instead, they’re letting you use their income and credit scores to qualify for the loan.

The right co-signer is someone with better credit and a lower debt-to-income ratio than you. Keep in mind, though, even though the co-signer doesn’t live with you or doesn’t drive your car if you default on the loan, the co-signer is legally responsible for the debt.

>> More: What Credit Score Do You Need for a Personal Loan?

Is a Co-Borrower the Same as a Co-Signer?

A co-borrower and co-signer have many similarities, but they aren’t the same thing. A co-borrower is someone that stands to benefit from the asset, whereas a co-signer is simply helping you get the loan you need and hopes that you’ll make the payments, so they don’t have to.

What Are the Differences Between a Co-Signer and a Co-Borrower?

Again, co-borrowers and co-signers seem fairly similar, but here are their differences.

Dealing with Debt

Co-borrowers actively take on the debt with the borrower because they intend to use the loan’s asset. They know what they are getting into and stand to gain from the loan.

Co-signers guarantee the loan. They are the reason you get approved because you probably couldn’t secure the necessary financing without them.

Repayments

Co-borrowers create a budget or plan together to pay off the loan debt. They know what they’re getting into and make sure they can afford the loan before accepting it.

Co-signers hope to never have to repay the loan they guarantee. Their goal is to help you get the loan you want and repay it as agreed. If you don’t, though, co-signers will be responsible for the debt, or it will ruin their credit too.

Who Receives the Funds?

Co-borrowers both receive the funds to use for their intended purposes, such as buying a house or buying a car. The bank disburses the funds in both names for use as intended.

Co-signers don’t receive the funds. They simply allow the use of their name and personal financial information to help you secure the loan.

Pros and Cons of Co-Signing a Loan

There are pros and cons to co-signing a loan, like any personal finance decision. Here’s what you should consider.

Pros:

  • You may qualify for a loan that you otherwise wouldn’t get or for better terms than you would qualify for on your own.
  • You might be able to borrow more money than you would qualify for on your own if your debt-to-income ratio is too high or your credit score is too low.
  • On-time payments (from the borrower) can help build credit for both the borrower and the co-signer.
  • Co-signers aren’t responsible for payments as long as the borrower makes them on time.
  • Co-signers help someone who otherwise wouldn’t secure a loan get what they need.

Cons:

  • Co-signers put their credit at risk, and if the borrower defaults, it can hurt the co-signer’s credit.
  • Co-signers could be held responsible for a loan that doesn’t benefit them if the borrower doesn’t make their payments.

Pros and Cons of Co-Borrowing a Loan

Pros:

  • You have two applicants rather than one, so you have a better chance of securing better terms or qualifying for a higher loan amount.
  • Timely payments can help both applicants build a solid credit history.
  • Both applicants typically have an interest in the asset the loan paid for.
  • Having two people responsible for the loan makes it easier to budget and ensure it gets paid on time.

Cons:

  • If one applicant has a bad credit score or high debt ratio, it can hurt your chances of approval or cause you to get worse terms.
  • The debt remains both parties’ responsibilities unless legally removed from the debt. Even if you get divorced, or one borrower dies, the other is still responsible for the debt.

Is it Better to Have a Co-Signer or Co-Applicant?

Sometimes it’s not a matter of which is better – a co-signer or co-applicant, but rather about what you need. If you’re buying an asset with someone, it makes sense to have a co-applicant. You both benefit from the asset and will be responsible for repayment.

If your co-applicant makes matters worse because they have bad credit or a high debt-to-income ratio, and you can’t qualify on your own, you might need a co-signer. Just make sure the co-signer you choose has better credit and a lower debt-to-income ratio than you to help you secure better terms.

When Is a Co-Signer the Best Option?

A co-signer is the best option when you’ve exhausted all other options. A co-signer doesn’t benefit from the asset, so they are literally just doing you a favor. If you can’t get approved for an affordable loan and you don’t have a co-applicant or your co-applicant doesn’t have good qualifying factors, a co-signer is the best option.

What Is a Co-Borrower the Best Option?

A co-borrower is the best option when you’re buying a home or car with someone that will also benefit from it. As long as your co-borrower has decent credit and a debt ratio that won’t ruin your chances of approval, a co-borrower is the right option.

What Should I Do Before Co-Borrowing or Co-Signing a Loan?

Before considering co-borrowing or co-signing a loan, understand the responsibility you’re taking on. You agree to the loan terms when you put your name on a loan, either as a co-signer or co-borrower. Even if you don’t live on the property or drive the car, you could become responsible if you put your name on the loan.

Before you sign on the dotted line, talk to the person you’re going on the loan with about the process. Make sure you are both on the same page and that the loan makes financial sense. Look at the borrower’s financial future (if you’re a co-signer) and decide if it makes sense to take on such a loan.

If you’re a co-borrower, make sure you can both afford the loan and that it fits within your budget. Also, consider whether you see yourself with this person in your life for the loan term. Remember, even if you get divorced or go your separate ways, the debt remains your responsibility.

Bottom Line: Co-Borrower vs. Co-Signer

Think long and hard before becoming a co-borrower or co-signer. A co-borrower is typically on the same page with the borrower since you both have something to gain from the asset. A co-signer, however, is doing you a favor.

No matter what your title is, though, both parties are responsible for the debt. Make sure it makes financial sense and that it’s possible for the main borrower to make the payments as agreed.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.