Shawn Manaher
Shawn Manaher
Updated on December 18, 2022
co signer vs co borrower

What’s the difference between a co-signer and a co-borrower? Here’s everything you need to know about how they differ and affect various loans.

Understanding the terminology to apply for a loan can be overwhelming. If you have bad credit or no credit, you may need to consider adding a co-signer or co-borrower for a loan. You can also use these options when you intend to use the loan for an asset that will be shared between you and another party. But how do you know which one to choose?

A co-signer and a co-borrower do have some slight differences. In short, a co-borrower will have a higher responsibility to repay the loan should you be unable to do so. The biggest difference boils down to the expectations of the co-person on the loan.

Before you choose whether to be a co-signer or co-borrower or to use one of these options, it’s important to establish what it might mean for both parties. In this guide, we will break down the differences so you can fully understand what these terms mean. Read on to learn more!

Co-Signer Vs Co-Borrower

Having a co-signer or co-borrower could be the difference between receiving approval or denial for a loan. This is particularly true with cases of an individual who simply doesn’t have a positive credit history whether they are new borrowers or have past debt on their record.

In addition, the scales to approve a loan often look at debt to income without seeking out the true details. If you are over their debt-to-income threshold, you likely will not be approved without another signer or borrower on the loan, regardless of your ability to pay.

When that occurs, a co-signer or co-borrower could be brought alongside the initial borrower to make the loan work. Understanding the differences will help you to determine which option is suitable.

We will break down the official definitions of each of these shortly. The primary difference is the responsibility of that party and what the loan might mean for them. Both parties would be legally responsible for the debt should the initial borrower fail to pay. However, a co-signer typically just backs the borrower to help them get approval while a co-borrower is invested in the loan and the loan’s purpose.

In the same way that a co-signer is simply backing the borrower for approval, they also rarely receive any benefit from the loan. The loan is meant for the borrower(s), and the co-signer is like a third party that is on standby.

Not only do the co-signer and co-borrower have different roles for the loan, but their intentions behind the loan are also very different. You can set them apart by remembering that a co-signer is an assistant to receive approval for a loan, while a co-borrower is involved and invested in the loan itself. Both maintain some responsibility.

Let’s break it down further for you.

What Is A Co-Borrower?

The co-borrower is a member of the loan. They will have both responsibility and ownership of the loan. Co-borrowers are like joint owners of the loan in question.

Here’s a great example for you. An individual that is purchasing a home with their spouse will be in a borrower and co-borrower situation. One of the members of the couple is the borrower, and their spouse is the co-borrower. Both of these individuals are equally invested and equally responsible for this mortgage.

The individuals are sharing this debt in a joint design and will work as a team to then repay the debt according to the loan terms. The borrowers both benefit from the loan, and both enjoy whatever the loan happens to provide for them.

These two individuals had something they wanted to purchase and chose to take a loan out together in order to make the purchase. They are joint beneficiaries and share equal responsibility to repay the loan.

When Is A Co-Borrower The Right Choice?

A co-borrower should be used in the event that two people want to make some sort of joint purchase or investment. In the example above, this purchase was a home, but it could be anything.

In a co-borrower situation, the individuals will both take ownership of the loan and the asset that is purchased from the loan. Remember that these individuals will share a responsibility to repay the loan, and both are considered beneficiaries of the loan.

What Is A Co-Signer?

A co-signer is a person who is added to a loan to help another individual qualify. They offer additional backing to the borrower in order to boost their ability to get the loan. In most cases, the assets, income, and credit score can help the borrower obtain approval for a loan.

The co-signer is meant to be a backup for the borrower. They are there to help them get approval but have no interest in the loan. The primary borrower will be the one responsible for the loan. The co-signer will be responsible in the event that the primary borrower fails to make payments as agreed in the loan terms.

The co-signer is not a direct beneficiary and, in most cases, will not be granted any ownership from the asset tied to the loan. They are guaranteeing that should the borrower fail; they will take over. The expectations on their part would be that the borrower does not fail.

When Is A Co-Signer The Right Choice?

It is important that a co-signer understand they could be responsible for this loan if the borrower fails to pay. They likely have no ownership from the loan but will need to be prepared to step in if needed. If the borrower fails to pay, they will be responsible and their credit could suffer as well.

A co-signer should understand the terms of the loan and trust that the primary borrower will be able to pay and uphold their responsibility. This is the right fit when the primary borrower simply needs assistance getting approval.

If you are a co-signer, be sure that you and the primary borrower have a clear understanding of the expectations. You will want to be sure they communicate with you should they be unable to pay for some reason.

Understand that a co-signer is still legally responsible but they are generally not physically invested in the loan itself.

Co-Signer Vs Co-Borrower In An Auto Loan

This is a good time to remember just what the differences are between these two types of loans. Take note that a co-signer is not an owner. They are acting as a guarantor for this loan to help the primary borrower obtain approval.

A co-borrower is also an owner of the loan and the asset. They are borrowing jointly with the primary borrower and have an interest in the asset.

For an auto loan, the difference is this.

  • A co-signer guarantees the loan but is not on the title of the vehicle
  • A co-borrower is on the title and is a joint borrower with equal responsibility

The co-borrower will work together with the primary borrower to be sure the loan is repaid accordingly. They will enjoy the ownership benefits of the auto as well. The co-signer will assume responsibility only if the borrower fails to pay as expected. They have no ownership in most cases.

The difference primarily boils down to responsibility and ownership of the loan and any assets acquired by the loan.

Co-Signer Vs Co-Borrower In Mortgages

When it comes to a mortgage, the way that the process works may depend on the lender and their terms or requirements, some mortgage lenders will not allow for co-signers due to the long-term nature of the loan and the asset.

However, in the event that a lender will allow for a co-signer, it works much the same as described throughout this guide.

A co-signer will sign as part of the loan, backing up the primary borrower(s). They will not retain ownership of the home in any way but will act as a guarantor should the borrower not be able to pay. They are legally responsible for the loan but have no legal benefit or ownership from the loan.

A co-borrower of a mortgage will be a joint borrower of the loan but also a joint owner of the home purchased by the mortgage. They will be equally responsible for making the payments, and they will also be direct beneficiaries whose names are listed on the mortgage deed.

In Closing

The basic thing to remember in the question of co-signer vs co-borrower is that a co-signer acts to back up the borrower but has no ownership of the asset. A co-borrower, in contrast, has ownership and joint responsibility for the loan.

Both the co-signer and the co-borrower have a legal obligation to repay the loan but they benefit differently from the loan proceeds, which is where the two terms are set apart the most. The responsibility only varies slightly, while the ownership and benefits are different in comparison.

Before agreeing to be a co-signer or a co-borrower, it’s important to understand what this means for you and the responsibility that both terms could require.

Shawn Manaher

Shawn Manaher

Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author.

He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.

He loves to share his personal finance tips and money management wisdom with others to help them find financial freedom.
Shawn Manaher logo
Copyright © 2022 • Shawn Manaher