What Is a Co-Borrower vs. a Co-Signer?

by Lee Nichols

    Without help, you may not qualify for a loan. While many people think of co-borrowers and co-signers as the same thing, they are different in the eyes of a lender. Both might provide the help you need for approval, but they have different rights and responsibilities when it comes to a loan.

    Co-Borrower

    Co-borrowers have ownership in the property securing a loan. A co-borrower must sign the loan papers and assume responsibility for repaying the loan. Some lenders refer to a co-borrower as a joint applicant. Co-borrowers apply for loans together. Often, they are spouses who want a larger loan than either could qualify for individually.

    Co-Signer

    Co-signers assume the liability for the loan if the primary borrower does not fulfill his obligation. Even though co-signers may have to pay for the loan, they have no security interest in the property. Depending on the language in the contract, a co-signer might not be able to take the property securing the loan if he has to pay the loan.

    Benefits

    Co-borrowers and co-signers can help you qualify for a loan if you cannot qualify on your own. Typically, lenders reject applicants if they have poor credit or no credit or do not make enough money to pay the debt. If you have a co-borrower, the lender can use the financial information from both of you when determining whether to approve the loan. If you use a co-signer with good credit, he is guaranteeing he will pay the loan if you default, which may make a lender more inclined to approve the loan. According to Military.com, a co-signer might also help you qualify for a Federal Housing Administration loan with a smaller down payment.

    Risks

    While the risks of being a co-signer or co-borrower are high, the ownership afforded to co-borrowers may make the responsibilities of that option worth it. Co-borrowers and co-signers are responsible for ensuring the lender receives his money. Creditors will report positive information to the credit bureaus only for the co-borrowers of a loan. However, lenders might report negative information to the credit bureaus for any borrowers and co-signers. If co-borrowers declare bankruptcy together, the filing might bar the lender from collection activity, but the joint bankruptcy does not extend protection to a loan's co-signer.

    Considerations

    If you require a co-borrower or co-signer because of your credit score, consider taking steps to raise your score before applying for a loan. According to MSN Money, some of the things you can do that will quickly affect your score include getting a credit card if you do not already have one, taking out a small loan from a lender that reports to the credit bureaus and paying down the balances on any current loans. While one late payment can stay on your report for seven years, you can mitigate its effect by staying current on your obligations.

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    About the Author

    Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and graphic design and a Bachelor of Science in business administration from the University of Mississippi.

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