Cosigner vs Co-Borrower: Understanding the Key Differences
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What Is a Cosigner?
Pros of a Cosigner
Easier to qualify. Not only can having a cosigner make qualifying for loans easier, but they can also help the primary borrower qualify for a better interest rate. Can improve credit. If someone can only qualify for a loan with a cosigner, doing so gives them the opportunity to make on-time payments and improve their credit score.
Cons of a Cosigner
Cosigner must have good credit. In order to qualify for the loan, the cosigner must have a good credit score and a low debt-to-income ratio. Cosigner takes on risk. If the primary borrower fails to make timely loan payments, the cosigner ends up on the hook for those payments or risks hurting their credit score. Hurts credit score initially. When applying for a loan with a cosigner, both the borrower and the cosigner need to undergo a hard credit inquiry, which temporarily lowers their credit score. Can harm the relationship. Usually, only a close friend or family member agrees to be a cosigner. If the borrower doesn’t make their loan payments, that can cause stress for the cosigner and damage the relationship.
What Is a Co-Borrower?
Pros of a Co-Borrower
Easier to qualify for higher limits. Because two borrowers are applying, it can be easier to qualify for larger loan amounts if they both have sources of income. Ownership of funds or assets. A co-borrower has equal access to the loan funds or the collateral linked to the loan.
Cons of a Co-Borrower
Can harm the relationship. Both co-borrowers need to be ready to work as a team to repay the loan on time or they risk fighting about the loan and forming resentments. Shared risk. Each borrower is responsible for making their payments, and if one is not able to do so, that puts the other one at risk.
Should I Be a Co-Borrower or Cosigner?
Trust in the relationship. How much do they trust their co-borrower or the primary borrower to make their share of the loan payments (or full loan payments) on time? If both parties fail to repay the loan in either situation, they risk defaulting on the loan and hurting their credit scores substantially. Risk of collateral. In the case of co-borrowers, there may be collateral backing the loan, and both borrowers risk losing that collateral if they fail to repay the loan. Ownership of funds or assets. If you want ownership of the loan or assets, it’s best to be a co-borrower. If, however, you have no interest in the loan and are only agreeing to pay the loan back if the borrower cannot, being a cosigner may be best.
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