Co-Signer vs Co-Borrower: What’s The Difference?

If you have ever applied to borrow a loan, you may have come across the option of adding a co-borrower or a co-signer. These terms refer to people responsible for repaying a loan along with the primary borrower.

Combining the resources and credit profiles of multiple people during a loan application can improve your chances of getting approved. But deciding whether you should get a co-borrower or a co-signer is not easy.

To help you decide what works best, here’s a short comparison between the two.

The term co-borrower is used when a loan has multiple borrowers.

Each borrower is responsible for repaying the loan and remains on the hook for repayment. At the same time, they also have the same access to the funds for repayment and the right to own the asset once the loan is repaid.

For example, you can become a co-borrower along with your spouse when applying for a mortgage. Both of you bear the same responsibility for the mortgage payments, and both of your names appear on the relevant property documents evidencing ownership.

Usually, only a spouse or an immediate relative is allowed to sign up as a co-borrower. A steady source of income to meet the repayment obligation is also a criterion for banks to approve a candidate as a co-borrower. It is best to check with the lender about the exact eligibility requirements of a co-borrower before you apply.

You can borrow a higher amount

Depending on your combined credit profile and score, lenders may approve your application for a higher loan amount.

Easier to get a loan on favourable terms

As the lenders consider two income streams instead of one, there is a chance that they may offer the loan at a lower interest rate. One borrower having a better credit score increases the likelihood of this happening.

Your credit score can plummet

As a co-borrower, you have a primary obligation to repay. As a result, any missed payments by either co-borrower can damage the score of the other borrower. It can also impact their chances of securing future borrowings on favourable terms.

Your relationship may be jeopardised

If you fail to discharge your obligation as a co-borrower, it may sour your relationship. This can be particularly damaging when spouses co-borrow a loan and one refuses to pay up.

Co-signer is someone who guarantees a loan for someone else. They agree to repay the loan if the primary borrower defaults on repayment.

While there is no specified minimum credit score for a personal loan in Australia, it is possible that the primary applicant’s score doesn’t meet the cut-off set by the lender. In such cases, having a co-signer on your loan application makes you a more attractive applicant for lenders as they are more confident about getting repaid.

Adding a co-signer is preferred for certain situations where the primary borrower's credit profile is insufficient to cover the lending risk. For instance, if you are newly employed and want to borrow a personal loan, you may be approved once you get a co-signer for your loan application.

To qualify as a co-signer, the applicant should have a good credit score and enough earnings to repay the loan. Usually, there are no restrictions on who can be a co-signer, and you can ask a friend or a family member.

Banks may have specific requirements regarding the eligibility criteria of co-signers based on the type of loan borrowed. For example, co-signing debt consolidation loans may not be permitted.

Pros

Primary borrowers can borrow on better terms

Becoming a co-signer on loan helps the primary borrower to get a better interest rate and favourable lending terms.

Borrowers get a credit boost

The primary borrower can develop a good credit profile thanks to the on-time payments from the co-signer.

Cons

Co-signer has limited rights

Even though you may become a co-signer on a specific loan, such as a car loan, and remain on the hook for payments, you have no right over the car when the primary borrower defaults.

Your credit score may go down

If the primary borrower defaults on the loan payment, your credit profile can go down. The bank may also ask you to pay the balance, and your credit score may take a further hit if you don’t pay on time.

If you have already signed up as a co-signor, keep an eye on your credit score and review your credit report regularly. Apart from contacting credit reporting bodies, you can also sign up with ClearScore check credit score and get your free credit report.

A critical difference between a co-signer and a co-borrower is that co-signers do not enjoy any ownership of the asset tied to the loan. Their only responsibility is to pay off the loan if the primary applicant defaults.

On the other hand, a co-borrower not only shares the responsibility to pay off the loan but also the interest in the asset. If you take a loan to purchase a property and your spouse is a co-borrower, you jointly own the house once the loan is paid off.

Secondly, a co-signer has no obligation to offer any collateral for securing the loan or ensure regular payments. Their liability only kicks in when the primary borrower fails. In contrast, a co-borrower is on the hook for repayment from the first day and may be required to provide collateral as security for the loan.

Lastly, only first-degree relatives are permitted by lenders to sign up a co-borrower. However, there are no restrictions in the case of a co-signer. Even a friend of the primary borrower can co-sign a loan.

Whether you need a co-borrower or co-signer depends on what you expect from the loan.

Becoming a cosigner works for those loan applicants who cannot get approved based on their credit profile alone. Having a co-signer increases their chance of borrowing a competitive rate and better terms.

Co-borrowing works well if you want to share the responsibility of loan repayment with someone and have access to a shared pool of funds. It is also important to remember that all co-borrowers have equal claims over the assets tied to the loan.

Similarly, from the standpoint of a co-borrower or a co-signer, what works better depends on the type of risk they want to carry. Co-borrowing is the right option for someone who shares a common financial goal with the other borrower. Alternatively, co-signing is the right decision if someone wants to increase the chances of a loved one being approved for a loan.

If approached to become a co-borrower or a co-signer for a loan, consider the following:

• Are your financial habits similar?
• Can you afford to repay?
• Will co-signing or co-borrowing impact your future goals?

It is also advisable to speak to an attorney to understand the rights of a co-borrower and co-signer under the law.

While getting a co-borrower or a co-signer has several benefits, there is ample scope for something going wrong and damaging your relationship.

Ideally, a primary applicant with a weak credit profile should consider approaching lenders who provide loans for bad credit before asking someone to become a co-borrower or co-signer.