Need a Loan? Here’s How to Decide Between a Co-Borrower and a Co-Signer

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From financing a car to obtaining a personal loan, most people need to apply for credit at some point. If you have strong credit, you should have no problem obtaining loan approval on your own. However, you may want to add a co-borrower or a co-signer in certain situations. Knowing the difference between these two terms before you apply for a loan is essential.

Definition of Co-Borrower

Bankrate.com defines a co-borrower as someone who assumes the same liability for repaying the loan as the primary applicant. A married couple applying for a joint loan is a common example. People who decide to start a business together may also choose to take out a loan with a co-borrower. Both parties receive the benefit of the funds, and the lender reports payment activity for both to credit reporting agencies.

The main advantage of applying for a loan with a co-borrower is the ability to receive approval for a larger amount because the lender considers the income and credit history of both applicants. When a loan requires collateral such as a home or a car, lenders allow co-borrowers to include jointly owned property.

Obtaining a loan with a co-borrower also presents risk. For example, one party may experience financial difficulties later and fall behind on payments. The other party would then need to assume 100 percent of the responsibility for keeping the it current. Another potential drawback to consider is that separating liability later can be difficult to do if the relationship of the applicants breaks down.

Definition of Co-Signer

According to U.S. News and World Report, a co-signer assumes responsibility for repaying the loan if the primary borrower defaults. Unlike a co-borrowing situation, people who co-sign a loan do not own the property for which they have assumed liability. What that means in practice is that the lender does not add the name of the co-signer to the property title.

People typically use a co-signer because their own credit is not strong enough to gain approval for a loan. Young adult children co-signing with a parent because they have not yet had time to build a solid credit history is a common example.

Before agreeing to co-sign a loan, it is important to understand that any missed payments by the primary applicant reflect on the credit file for both applicants. Some people choose to refinance a loan when their credit is stronger to remove the obligation from the co-applicant.

How to Choose the Best Option

If you are married and want to share responsibility for loan repayment with your spouse, a co-borrowing situation makes the most sense. This can also be the best option for business partners. When you have poor credit or are young without much of a credit history, having a co-signer can help you qualify for a loan and obtain the best interest rate.

One last consideration for gig workers is that obtaining credit can sometimes be more challenging due to an unsteady schedule or lack of pay stubs. The best way around this obstacle is to keep your business and personal finances separate as it will help you to stay organized.


About the Author: Lisa Kroulik has worked as a freelance content marketing writer for 10 years. She loves the work and the lifestyle it affords. Learn more about Lisa’s work and availability through Writer Access.

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