Co-Borrower Vs. Cosigner: What’s The Difference?

If you have a low credit score, short credit history or another financial factor that makes it harder to qualify for a loan, a cosigner or co-borrower could increase your chances of loan approval and help you secure better terms. While both share legal responsibilities for repaying the loan, a co-borrower has no access to the borrowed funds. Understanding these differences can help you decide which option to choose and set expectations from the start.

Cosigner vs. co-borrower comparison

The most important difference between a co-borrower and a cosigner is the degree of investment in the loan. A co-borrower, also known as a co-applicant or joint applicant, has more ownership than a cosigner because a co-borrower has access to the loan funds.

What are cosigners?

A cosigner is a guarantor for the primary borrower and agrees to take equal responsibility for repaying a loan, though they are not expected to make payments unless the primary borrower defaults on the loan. The cosigner normally has better credit or a higher income than the primary borrower, who might otherwise not get a loan application approved without the help of a cosigner.

Cosigners typically have a close relationship with the primary borrower. A cosigner is typically a parent, immediate family member, a partner or spouse.

Cosigner pros and cons

Pros

• Can increase the primary borrower’s approval odds.
• It could help the borrower secure a lower interest rate.
• The primary borrower is the sole owner of the funds.

Cons

• Cosigner must have good credit.
• Both credit scores could suffer if the borrower pays late.
• Cosigner is legally responsible for repayment.

Who a cosigner is best for

Cosigning is typically preferable if only one of the borrowers will benefit from the loan. For example, if a young person without established credit wants a personal loan, the bank might decide that the loan is too risky without a cosigner. A parent with good credit might agree to cosign with the understanding that their child will pay it back.

What are co-borrowers?

A co-borrower is a person who shares responsibility for repaying a loan with another person. In addition to both parties being responsible for making payments toward the loan, assets that guarantee the loan — like a home or car — may be owned by both co-borrowers.

Applicants with co-borrowers are more likely to receive larger loan amounts since they are viewed as less risky for lenders. Each co-borrower has equal access to the loan funds. And if the loan was used to secure property — like a vehicle — often both co-borrowers will be listed as owners.

Co-borrower pros and cons

Pros

• Can make it easier to qualify.
• Can boost eligibility for a better rate and larger loan amount.
• Shared ownership of funds and responsibility for repayments.

Cons

• Hard credit inquiries can cause a temporary dip in both credit scores.
• Risk of making payments on your own if the other person is unable to help.
• Both credit scores could suffer if the loan isn’t paid on time.

Who a co-borrower is best for

Co-borrowing is typically preferable if both borrowers will benefit from the loan. For example, if two people start a business together, they might take out a small business loan as co-borrowers and work on paying it back together. Both directly benefit from borrowing and enter the transaction knowing that they will each be making payments.

How to choose between a cosigner or co-borrower

If you’re trying to decide between being a co-borrower or a cosigner, think of how much involvement you want the other borrower to have and how the loan is going to be used. 

Less loan involvement, passive benefits: Whether it’s a secured or unsecured loan, a cosigner generally won’t have to put up collateral or accept responsibility for regular payments. If the primary borrower makes on-time payments, the cosigner doesn’t need to worry about the loan. They could even see an improved credit score due to the personal loan without having to do anything beyond completing a loan application. 

However, if the primary borrower defaults, the cosigner will be on the hook for payments despite not having access to the loan proceeds. And they might have difficulty getting approved for other loans since it still counts toward their total debt-to-income ratio (DTI).

More loan involvement, active benefits: By contrast, a co-borrower benefits from the loan directly by having access to the funds and getting better terms. Lenders may offer low-interest-rate loans or good credit loans with higher loan amounts, especially if both borrowers have good credit. And since each borrower has equal responsibility, you may not need to provide additional collateral to secure the loan. However, the co-borrower is an active participant in upholding the financial obligations of the loan, like making payments.

Here are a few examples of when a co-borrower or cosigner is a better option.

What should I do before co-borrowing or cosigning?

Before co-borrowing or cosigning a loan application, have an open conversation with the other person. Determine if the loan is necessary, consider other options and discuss each person’s financial picture and future goals.

Because both options have considerable financial risk, you should consider a contract that outlines how responsibility will be split and what happens in worst-case financial situations. It is also useful to research your state’s co-borrower and cosigner rights. There may be protections around property ownership and how credit is impacted by a personal loan.

Bottom line

Ask yourself a few questions before applying for a loan with someone else:

• Can you afford to make payments toward the loan?
• How stable is your source of income?
• How will cosigning or co-borrowing affect your future goals?
• How could cosigning or co-borrowing affect your relationship with the borrower?
• What are the financial habits of the co-applicant or primary borrower?

Co-borrowing might make sense if you know the risks and want to borrow money with someone to accomplish a common goal. Alternatively, cosigning might be right for you if you want to help out someone you trust.