Cosigner vs. Co-borrower: What’s the Difference?

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Cosigners and Co-borrowers for Auto Loans

What Is a Car Loan Cosigner?

A cosigner is someone who agrees to be responsible for repaying a loan if the primary borrower fails to do so. The cosigner is on the credit contract along with the borrower and becomes equally obligated to repay the debt.

What Is a Car Loan Co-borrower?

A car loan co-borrower is a person who is added to a car loan as an additional borrower. This individual’s credit history, income, and assets are assessed by the lender in order to determine their eligibility for the loan. By adding a co-borrower to the car loan, both parties are able to benefit from more favorable rates and terms.

Differences Between Cosigners and Co-borrowers

Generally speaking, when adding someone to a loan agreement to provide support for the primary borrower, there are two roles: cosigners and co-borrowers.

These two concepts are sometimes wrongfully used interchangeably, but they actually refer to very different roles in the world of borrowing money. While both cosigners and co-borrowers share some degree of financial risk for defaulting loans, there are some important differences between their roles.

Vehicle Use

The most evident difference between cosigners and co-borrowers is based on who is intended to use the car. Cosigners are usually only helping the primary borrower get approved and don’t intend on actually using the vehicle themselves. Co-borrowers, however, are added as a secondary party to the loan and typically intend to share use of the car.

Financial Contribution

Most often, in a cosigner situation, the primary borrower is expected to be fully responsible for making the loan payments and any down payment at the time of taking out the loan. Where as a co-borrower, someone would likely be expected to contribute to the payments.

Financial Risk

Cosigners are most often used to secure financing for a buyer whose credit score is not high enough to get approved on their own – the cosigner is typically much better off from a financial risk standpoint. Co-borrowers, on the other hand, are often near equals in terms of financial risk.

Negotiating Loan Terms

Cosigners are legally bound by the terms of the contract from the moment that they sign it and they may have much more power when it comes to negotiating conditions with the lender.

In contrast, co-borrowers may not have as much say in any resulting agreements and must comply strictly with any terms they agree to, just as the primary borrower does.

How to Choose Between Having a Cosigner or Co-borrower

When deciding whether to obtain a cosigner or co-borrower for your loan, it is important to consider several key factors.

First and foremost, you need to think about the purpose of your loan and how much money and approval assistance you will need. Depending on what type of car loan you are taking out and if you’re working with a lower income, one option may be more appropriate than the other.

Another important consideration is your credit history. If you have poor or limited credit, having a cosigner with strong credit can help improve your chances of getting the loan approved even if your own personal credit score isn’t stellar.

If you already have good credit on your own, a cosigner may not be necessary since most lenders will offer loans based solely on your financial profile without considering someone else’s credit history.

Is it Better to Become a Cosigner or Co-borrower for Someone Else?

Much like determining whether a cosigner or co-borrower is more appropriate for your loan, it’s important to consider the responsibilities and purpose of becoming one or the other for someone else’s loan.

If you’re asked to cosign for someone, it can have severe financial implications and risks, so think things through.

If the person who is asking you has the means to pay for the car themselves and they are intending to be the sole driver of the car, you’d more likely be a cosigner if you agree. Just be aware that if they fail to make their payments, you’ll be responsible.

If the person who is asking you is in a similar credit situation and intends to share the vehicle with you, you’d more likely be a co-borrower on the loan. Similarly, you’ll be held responsible for payments together. So talk things through and make sure that you and the other borrower have the right expectations.

Does being a Co-borrower or Cosigner Impact My Credit?

Yes. In both roles, your credit could be affected.

Now, this could be either a positive or negative impact, depending on how the loan is handled.

If the loan is paid off on time and at least at the minimum payment, you could see your credit score improve over time because you’re adding positive payment history. It could also go down, of course, if you and/or the other borrower fail to make payments.

With enough missed payments, you could even be facing repossession as a co-borrower or cosigner, which will significantly hurt your credit.