When applying for a loan, your credit history, income, and the way you manage your finances plays a huge role in your approval and interest rate of the loan. When your credit score is too low to qualify for the loan, often the assistance of a co-borrower or co-signer can help. Learn how to choose which option is best for your borrowing needs.
Introduction to Co-Borrower and Co-Signer
Using a co-borrower or co-signer may help increase your ability of getting approval for financing a car, home, credit card, or other loan. If you have less than perfect credit or are just starting your credit building journey, adding a co-borrower or co-signer can help secure a loan for your borrowing needs.
What is a Co-Borrower?
A co-borrower, or co-applicant, is someone who is named on the loan, shares financial responsibility of repaying the loan and also has ownership in the collateral the loan was used for (i.e., home or vehicle).
What is a Co-Signer?
A co-signer is someone who allows you to utilize their good credit history so that you can better qualify for a loan while you make the payments and maintain ownership. A co-signer does not have legal ownership in the collateral that the loan was used for (i.e., home or vehicle).
Impact on Credit
Both a co-borrower and co-signer are legally responsible for the loan if the primary borrower doesn't pay. This means late or missed payments will also negatively impact their credit.
Difference Between
Co-Borrowers and Co-Signers
Here is the key difference between a co-borrower and co-signer that you should be aware of before you consider adding one to your loan.
Ownership and Legal Responsibilities
Co-Borrower: A co-borrower is jointly responsible for the loan and ownership is shared. This means the borrower and co-borrower share equal financial responsibility for the loan as well as ownership of the asset that the loan covers (i.e., home or vehicle).
Co-Signer: A co-signer has secondary responsibility for the loan without ownership of the funds or assets you’re signing the loan for. This means the borrower has ownership of the asset that the loan covers (i.e., home or vehicle) but the co-signer is also financially responsible for the loan.
When to Use a Co-Borrower vs. Co-Signer
There are times when using a co-borrower is the best option for your financial needs and other times a co-signer may be a better fit. Here are examples of when it makes sense to use a co-borrower vs. co-signer.
Example of When to Use a Co-Borrower
Buying a Home Together: When a couple purchases a home together, they are considered co-borrowers on the loan. This gives the couple equal stake in owning the home and financial responsibility of the Mortgage.
Business Loans: If more than one person is starting a new business venture, they'll be co-borrowers on the loan. This gives all parties equal ownership of the business venture.
Joint Auto Loans: Family members will often be co-borrowers, such as when a parent signs for their child to to purchase a vehicle. This means the parent and child both take financial responsibility of the loan and ownership of the vehicle.
Examples of When to Use a Co-Signer
Low Credit Score: If you have less than perfect credit or a low credit score, a co-signer may help you get approved for a loan or credit card with a better interest rate and repayment terms.
Student Loans: If you have little or no credit, a co-signer may help you secure funding for college or post-secondary education expenses.
Renting an Apartment: Some landlords require stellar credit history to obtain a new lease. If you have a few hiccups on your credit or a less than perfect score, using a co-signer may help you secure the lease.
Best Practices for Co-Borrowers and Co-Signers
Co-borrowers and co-signers should take the act of signing a loan or credit card with someone very seriously since it requires trusting the primary borrower's ability to repay. It's important to discuss a plan for repayment to ensure financial obligations are met. Here are some best practices to consider when co-borrowing or co-signing for a loan or credit card.
Clear Communication
Financial disagreements can impact personal relationships for both co-borrowers and co-signers. Before agreeing to become a co-borrower or co-signer, be sure to discuss the expectations and responsibilities upfront with the primary borrower so they know exactly what is expected of them. Having clear communication and trust is a smart money move.
Legal Agreements
Consider having a formal agreement that outlines the terms of the loan or credit card signing, each person's financial responsibilities, and what happens if the loan or credit card goes into default. This can help protect legal obligations and avoid negative financial consequences for both signers.
Monitoring Progress
Both co-borrowers and co-signers can be held legally responsible for repayment of the loan or credit card if the primary borrower misses payments or defaults. This is why it's important to regularly monitor progress and discuss any financial concerns immediately. Making late payments or missing payments can negatively impact credit, which may affect future borrowing opportunities for everyone involved.
Peach State Can Help Find the Right Loan Option for You
Deciding between a co-borrower and a co-signer involves understanding their responsibilities, impacts on credit, and legal implications. If adding a co-borrower or co-signer doesn't fit your needs, Peach State offers lending solutions designed to help first time borrowers and those with no credit or less than perfect credit get financing.
- Our Fresh Start Auto Loan is a second chance auto financing program designed for members with less than perfect credit.
- For first time car buyers between the ages of 18-26, our Ready, Set, Drive! program can help you get behind the wheel of your very own car.1
- If you're on a journey to build or repair your credit, a Share Secured Loan is great a way to begin. You can focus on making affordable monthly payments while funds are secured with deposits in a savings or share certificate account.
- Student Rewards Visa Credit Card is designed for younger members who are wanting to build their credit. The minimum age is 18. Please note: a co-signer may be necessary if your income is not sufficient for repayment.
Successful financial partnerships rely on trust. At Peach State, our members come first, not profits which is why you can trust that we'll always have your best interests in mind!
1 Certain conditions apply.
