What Is a Co-Signer?
A co-signer is somebody who guarantees a loan for somebody else. The co-signer agrees to repay the loan if the primary borrower fails to do so. As a result, lenders are more confident about receiving payments, so they may be more willing to approve the loan application. Co-signers help you get approved for a loan, but they typically do not have an ownership interest in whatever you’re borrowing the money for. However, laws may vary from state to state, so it’s wise to check with a local attorney when buying a property with a co-signer or when co-signing for someone else.
What Is a Co-Borrower?
A co-borrower is one of several primary borrowers. For example, when multiple people buy a home, they can apply for a loan as co-borrowers. Co-borrowers may have an ownership interest in the thing they’re borrowing for, such as joint homeowners applying for a home loan together.
Similarities Between Co-Signers and Co-Borrowers
Full Responsibility
Co-signers and co-borrowers can both be held accountable for a loan. Even if co-borrowers don’t split ownership of property equally, each borrower may be held 100% responsible for the debt. Co-signers may also have to pay off a loan when the primary borrower stops making payments, not to mention additional charges.
Help Qualifying
When a borrower can’t qualify for a loan on their own, adding a co-signer or co-borrower can be helpful in a variety of ways:
An individual borrower might not have good credit, but a co-signer with a strong credit score helps reassure the lender that it’ll be repaid. Likewise, adding a co-signer with high credit scores can improve your chances of getting approved for the loan. The borrower might not have enough income to meet lender requirements, but a co-signer with a high income may help guarantee the loan. For large loans like home loans, adding a co-borrower with a high income to the application may help with debt-to-income (DTI) ratio calculations.
Differences Between Co-Signers and Co-Borrowers
The primary difference between a co-signer and a co-borrower is that co-signers often don’t have an ownership interest in items you purchase with loan proceeds. Co-signers serve as a backstop if the borrower stops paying, while co-borrowers are involved in the whole deal.
Risks for Co-Signers
No Reward, All Risk
Co-signers need to know that they’re potentially responsible for paying off a loan that they get no benefit from. If somebody buys a car with your help, it’s their car—not yours. And if they disappear with the vehicle and stop paying the loan, it’s still your problem.
Your Ability To Borrow
Co-signing for somebody might make it harder for you to borrow when you need to. The loan you co-signed for may be listed as an outstanding obligation on your credit report if it’s still being paid down, and your next lender may not approve you for another line of credit until it’s paid off. If you are approved, you may not receive the best terms possible since you have another obligation.
More Than You Expected
When you co-sign for somebody, you might have to pay more than the loan balance and interest. If the borrower stops making payments, late fees and other charges may increase the amount due. In some cases, it’s possible to limit your risk, but be sure to get something in writing before assuming you’re protected. If you co-sign for somebody, ask the lender to provide duplicate statements or to notify you of any missed payments. Finding out about problems early might allow you to get proactive and limit the damage.
Risks for Co-Borrowers
Borrowing always involves risk, but it can be especially dangerous when somebody else is involved. For example, by combining incomes, you may be able to qualify for a relatively large loan, like a mortgage. But what happens if your co-borrower moves out or loses his or her income? Tragic accidents, breakups, and other circumstances can leave you with a loan that’s bigger than you can afford on your own. You probably don’t want to plan your life around these events, but it’s critical to know what the risks are. In some cases, it’s difficult to remove somebody’s name from a loan. Instead, you may need to refinance (if you can qualify on your own) or sell the property to pay off the loan.
The Bottom Line
While a co-signer or co-borrower can help someone qualify for a loan, the two play very different roles in the repayment of the borrowed money. If you’re in need of a co-signer or co-borrower, be sure it’s someone you trust, and communicate thoroughly with them so that they feel comfortable adding their name and information to the loan application. And if you’ve been asked to be a co-signer or co-borrower, consider the risks that come with it before signing on any dotted lines.
