Co-signer vs. co-borrower: What’s the difference?
Co-borrowers share loan responsibility; co-signers step in if the main borrower defaults
Let’s say you want to buy a home, but you are concerned you might not qualify due to your income or credit history. You could add another applicant to your loan to help you qualify based on their credit profile, thereby helping you secure a mortgage faster.
Both co-borrowers and co-signers can help you qualify for a loan, but what’s the difference between them? And when should you choose one over the other?
Key insights
- A co-borrower is a joint applicant who is equally responsible for the loan repayment.
- A co-signer is only responsible for loan repayment if the main borrower defaults.
- Co-borrowers are typically spouses or partners who will be helping repay the loan, while co-signers are typically parents or another trusted individual who will help the main applicant qualify.
What is a co-borrower?
Co-borrowers are joint loan applicants who share in the responsibility of the loan. This means each is responsible for the loan’s repayment.
Sudhir Khatwani, a finance expert and director of the website The Money Mongers put it this way: “Think of a co-borrower like a teammate: you both share the responsibility for the loan and, bonus, you both get to enjoy whatever you bought, like a house.”
Most types of loans allow co-borrowers to apply jointly. This includes:
- Student loans
- Personal loans
- Home Loans
- Home equity loans
- Auto loans
Co-borrowers cannot typically be added to a credit card to help you qualify, though most applications allow you to report total household income.
» MORE: Can you get a mortgage with student loans?
- Why do I need a co-borrower?
- You may not need a co-borrower, but it is a fairly common practice for loans where two or more parties have ownership of the asset.
For example, if you are buying a home with your spouse, they would usually be added as a co-borrower on the loan application. This can boost the amount you qualify for and potentially help you get a lower interest rate if they have a better credit profile than you.
- What does a co-borrower do?
- Co-borrowers have the same responsibility as any individual borrower on a loan. They are fully responsible for all loan repayments, and their credit score will be affected by any missed payments. If one of the borrowers cannot make the payments, the co-borrower must continue to make payments in full.
- Who can be a co-borrower?
- Anyone can be your co-borrower, although they are typically close family, a friend or a business partner who is OK with being jointly accountable for the loan.
- How to get a co-borrower
- You’ll want your co-borrower to have a strong credit score and a good income. This will help you both to qualify for better loan terms and a lower interest rate. A good co-borrower will also be diligent to help make monthly payments, as they are equally responsible for the loan.
Pros and cons of using a co-borrower
Co-borrowers can help you qualify for a loan but are equally responsible for the loan as well.
“Teaming up as co-borrowers can mean you get more money or better loan terms because you're pooling resources,” said Khatwani. “The catch? If one of you drops the ball, the other's picking it up.”
If you are planning on becoming a co-borrower, it’s important to trust the other person you are applying for the loan with. Defaulting on a loan can severely hurt your credit score, so it’s important to be prepared to make the entire loan payment if necessary in case your co-borrower cannot help for any reason.
Pros
- Shared burden for significant debt: Co-borrowers are just as invested as you to repay the loan on time.
- Combined buying power: You can combine your income and credit profile to qualify for a larger loan with better terms.
- Stronger loan approval chances: By applying together with a financially responsible co-borrower, a lender may look at you more favorably.
Cons
- Joint decision-making: Co-borrowers share the responsibility for the loan and have a say in what you are purchasing.
- Credit score impact: A co-borrower with a lower credit score can hurt your loan terms and interest rate, making it more expensive.
- Relationship stress: Having a co-borrower can put stress on a relationship, especially if one person feels they are taking on more responsibility than the other person.
What is a co-signer?
A co-signer is someone who joins your loan application to help you qualify for better terms and rates and acts as a guarantor for your loan balance in the case of a loan default. According to the Consumer Finance Protection Bureau, “having a co-signer on your loan gives your lender additional assurance that the loan will be repaid.”
Khatwani put it this way; “A co-signer…is more like your loan's guardian angel. They promise the bank they'll cover it if you can't, but they don't get any say in the property or thing you bought.”
» MORE: Guide to getting a personal loan with a co-signer
- Why do I need a co-signer?
- A co-signer will help you qualify for a loan if you can’t on your own. If you have a poor credit score or an insufficient credit history, lenders might not be willing to risk giving you a loan. Adding a co-signer allows lenders to qualify you based on their financial merits as well as yours.
- What does a co-signer do?
- A co-signer joins your loan application as a financially responsible party to the loan in case you default, but they have no ownership in the property or assets you purchase with the loan. Since co-signers aren’t a beneficiary for anything the loan is purchasing, they aren’t responsible for regular monthly payments.
- Who can be a co-signer?
- While a co-signer is often a family member or close friend, there are typically no restrictions on who can join your loan application as a co-signer.
- How to get a co-signer
- To get a co-signer, you need to find someone who has a solid credit history and is willing to take the risk of being responsible for your loan if you stop making payments. This is usually a trusted family member or friend.
Pros and cons of using a co-signer
Co-signers can help you qualify for a secured or unsecured loan you otherwise wouldn’t have, but it can be a burden on your relationship if you can’t repay the loan.
Khatwani said that “co-signers are giving someone with maybe not-so-stellar credit a helping hand. The tricky part is they're taking a gamble without directly benefiting from the loan.”
So, while getting a co-signer can be a good idea for some, for others it’s not worth the risk.
If you are looking to help someone apply for a loan by becoming a co-signer, you need to understand the risks you are taking. Becoming a co-signer does not entitle you to the asset or items being purchased, but you become responsible if they can no longer make payments. You should have full faith that the borrower can be trusted to handle the loan repayment.
If the borrower defaults on the loan, you will become responsible for loan repayment on a monthly basis. If you can’t make the payments, this will negatively impact your credit score and finances.
Pros
- Easier to qualify: A co-signer can help you qualify for a loan that you might not be able to on your own.
- Lower interest rate: A co-signer with a good credit profile may be able to help you secure a lower interest rate, saving you money.
- Generosity may strengthen your bond: If someone is willing to co-sign your loan, you will most likely respect them a great deal, and it can actually make the relationship stronger.
Cons
- Only one party benefits: Co-signers don’t take ownership of the asset or item purchased by the loan.
- Missed payments hurt the co-signer’s credit score: Co-signers risk damaging their credit history if you default on the loan.
- Potential damage to interpersonal relationships: If you miss payments, it can put a major strain on your relationship with the co-signer.
Comparing co-signers and co-borrowers
Co-signers and co-borrowers can both help you qualify for a loan, but they have different roles in the loan process.
What co-signers and co-borrowers have in common
Co-signers and co-borrowers are very similar in a few ways:
- They are ultimately responsible for the loan balance, regardless of whether or not the borrower pays.
- If the loan defaults, their credit scores will suffer.
- They may benefit the main borrower by utilizing their credit profile and income to help the borrower qualify for the loan.
Differences between co-signers and co-borrowers
While they are similar, there are some distinct differences between co-signers and co-borrowers, including:
- Co-signers do not share ownership of the assets or items purchased with the loan, while co-borrowers do.
- Co-signers do not share in the responsibility of the monthly loan payments, while co-borrowers do.
- Co-signers are only expected to make loan payments if the borrower defaults, while co-borrowers are responsible for all loan payments.
» MORE: Best ways to borrow money
FAQ
How many co-signers can you have?
In most cases, lenders only allow for one co-signer on an application with you. But you can have more than one co-borrower on a loan, up to a limit set by your lender.
How do lenders evaluate if a borrower or co-signer will pay them back?
Lenders typically evaluate potential borrowers or co-signers by evaluating their credit profile and score, income, debt-to-income ratio (DTI) and the condition of the asset being purchased with the loan. Lenders may also consider any collateral or assets the borrower or co-signer has, including bank account balances.
What is the difference between having a co-signer and becoming an authorized user?
A co-signer is a loan applicant who helps someone qualify for a loan (such as a mortgage or student loan), while an authorized user is simply someone who has access to your credit account (such as a credit card). An authorized user does not need to qualify to be added to a credit account, and the main borrower is solely responsible for paying back the debt incurred by the user.
Why do most student loans involve a co-signer?
Student loans are taken out by new college students who typically haven’t had enough time to establish a strong credit profile. Students also typically cannot qualify for the loan on their own due to lack of income. Co-signers help student borrowers to qualify and potentially get a much better interest rate.
Bottom line
Co-borrowers and co-signers both help you qualify for a loan and potentially get better rates, but they have very different responsibilities. Co-borrowers are commonly spouses or partners who are making a purchase with you, such as a new car or home. Co-signers are there to help you qualify for a loan, but don’t expect them to make payments unless you can’t.
If you’re going to use a co-borrower or co-signer on your loan, make sure you understand their expectations before applying. And you should only sign up for a loan that you are willing and able to make full payments on without relying on the other person. If you can’t keep up with loan payments, you are not only putting your credit profile at risk, but theirs as well.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Consumer Financial Protection Bureau, “What is a co-signer?” Accessed Aug. 19, 2023.
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