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When taking out a car loan, doing it with a co-borrower has a lot of potential, but it boils down to your situation. Let's take a look at exactly what a co-borrower is, the difference between a co-borrower and a cosigner, and the pros and cons of having a co-borrower or a cosigner on your car loan and your loan refinance.
What Is a Co-Borrower?
A co-borrower is someone who applies for an auto loan with you. As a co-borrower, the person is treated as an equal in the responsibilities, rights, and ownership of the car. A co-borrower's credit score, debt-to-income-ratio (DTI), income, assets, and other financials are also looked at during the application process. And because they're on the loan documents, they're also on the hook for making payments on the loan. For example, you and your spouse can apply for a car loan as co-borrowers. Or you and your sibling live together and plan on sharing a car, so you apply for the loan as co-borrowers.
Co-Borrower Meaning
So, what does a co-borrower mean, exactly? As mentioned earlier, a co-borrower is another person who will be sharing in both the financial responsibilities, rights, and ownership of a car loan. They are both on the hook for paying back the loan.
Can I Use a Co-Borrower to Refinance an Auto Loan?
Yes. The same advantages and considerations to using a co-borrower exist when you want to refinance as existed with obtaining the original loan.If you want to refinance the auto loan, which is when you take out a new loan, perhaps for a more favorable interest rate or better terms, you can add a co-borrower. While the lower of the two credit scores will be used in a co-borrower arrangement, combining incomes can help you snag better terms on your loan. You may find the cost to refinance an automobile more favorable with a co-borrower.Read up on the pros and cons of an auto refinancing before you proceed further.
Does It Matter Who Is the Borrower and Co-Borrower?
Because a co-borrower is simply another borrower on the loan, and both borrowers share equal responsibility in making payments, it usually doesn't matter who is the borrower or the co-borrower. It should be noted that on the loans with co-borrowers, sometimes a lender will note a primary borrower. This might be the person with the higher credit score, or perhaps the name appearing first in the application.
What Rights Does a Co-Borrower Have?
Essentially, a co-borrower has the same rights as the borrower when it comes to the vehicle. For example, should you want to list the car for sale or refinance the car, you can't do so without getting your co-borrower's permission. During the sale of a car, both borrowers usually need to be present to sign the car's title to the new owner. In the lender's eyes, a co-borrower is equally responsible for making payments on the vehicle—regardless if you and the co-borrower worked out some sort of verbal arrangement. Also, both you and your co-borrower could take hits on your credit scores if payments on the loan weren’t made in time.
Can a Co-Borrower Take the Car?
A co-borrower can take the car, but not without your permission. For example, if the co-borrower wants to take the car, sell it, or trade it in, you will need to sign off on it before the co-borrower can proceed. When it comes to signing the title to sell or trade in a car, there might be exceptions. Look closely at the fine print to see if both co-borrowers need to be present, or just one borrower does. The rules also vary by state, so both borrowers may need to be at the sale or trade no matter what the title says.
What Does It Mean to Be a Co-Borrower on a Loan?
As a co-borrower on a loan, it means that your name is on the loan and most likely on the title of the car. This means that you're responsible for helping to make payments on the loan until it's fully paid off. You're also considered an owner of the asset. If the other borrower wants to sell, trade-in, or refinance the car, they usually will need your sign off. As for negative repercussions, should you have trouble keeping up with payments, your credit will likely take a hit.
Co-Borrower vs. Cosigner
While commonly confused, a co-borrower and a cosigner are not the same thing. When someone is a co-borrower, his or her name is on the loan and the person is tasked with making payments along the way. While a co-borrower has the same financial responsibilities, rights, and ownership of the car, a cosigner does not. There are certain cosigner requirements, the main one being the cosigner must become involved and make necessary payments if the borrower is unable to. Typically, a cosigner comes into the picture in the first place if a borrower can't qualify for a car loan on their own. The reasons might include if there are blemishes on the borrower's credit profile and their credit score is low, or if they don't have much of a credit history. It's only when they're not able to keep up with payments that the cosigner is compelled to make those payments. A cosigner can be a spouse, relative, or friend – anyone who wanted to help the borrower qualify for a loan they probably wouldn't qualify on their own. The question of can a cosigner become the primary owner haunts some of these agreements. The truth is that even if the loan goes into default, the cosigner does not have the right to take the vehicle.
Pros and Cons of Using a Co-Borrower Versus a Cosigner
Let's look at the advantages and downsides of using a co-borrower versus a cosigner on a car loan: Pros of using a co-borrower:
May qualify for a larger loan amount
Can share in the repayment of the loan
Cons of using a co-borrower:
You're not the sole owner of the car
Typically need their sign-off before trading, selling, or refinancing the car
Both your credit scores could take a hit if unable to stay on top of payments
Pros of using a cosigner:
May qualify for a loan with better terms or larger amounts if you have less-than-stellar credit or are new to credit
You're the only owner of the car
Cons of using a cosigner:
You are the one on the hook for making payments, unless you fall behind and the cosigner must take over
If you don't stay on top of payments, it could hurt not only your credit score but also your cosigner's score
Is Having a Co-Borrower Best for You? Having a co-borrower when you take out a loan or refinance your auto loan can be a solid choice if you'd like someone to help you with payments, and if you don't mind co-ownership. This typically works best if you live with someone – if they're your spouse or a close relative. The help the co-borrower offers with credit and employment history in obtaining a car loan could make this a good choice.
Frequently Asked Questions
Does it matter who is the borrower and co-borrower?
What rights does a co-borrower have?
What does it mean to be a co-borrower on a loan?
Photo credit: iStock/Paul Bradbury
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About the Author
Jackie Lam
Jackie Lam is a freelance writer with experience covering small business, budgeting, freelancing and money, and personal finance. She has written for more than 60 outlets, including Salon.com, CNET, BuzzFeed, Business Insider, and Time's NextAdvisor. She is currently working on her AFC® financial coaching certification to help artists, freelancers, and small businesses.
