Depending on your finances, you may not be able to get a loan on your own. Or maybe you just want to share the loan with someone else, like your spouse. Learn everything you need to know about co-borrowers.
Loans with co-borrowers are also sometimes referred to as joint loans. Both parties have equal responsibilities for paying the loan. Importantly, they also have equal rights to the money or property in the loan. For a mortgage or car loan, this means neither the co-borrower nor the main borrower can sell the asset without the other’s permission.
Take a closer look at what a co-borrower is, how the process works, and when you may want to have one.
When taking out a major loan, you may want to get a co-borrower. This is not the right decision for everyone. Still, it makes sense in a lot of situations, especially in the case of spouses. Co-borrowers are just one way of adding someone else to your loan. As such, you should make sure you understand what having a co-borrower means and how it is different from other situations.
To put it simply, a co-borrower will share responsibility for the loan and ownership of the asset. This means that if it is a mortgage or car loan, the co-borrower also owns the property or asset, along with the main borrower. In the case of a financial loan, they have equal access to the funds.
In such situations, both the primary borrower and the co-borrower are responsible for making monthly payments. There is no default as to which person should pay, and lenders can go after either of these borrowers for the funds.
In many cases, loans with co-borrowers are called joint loans. This is because of the fact that each borrower has equal rights and responsibilities. Co-borrower loans or joint loans are especially common for spouses and others in long-term relationships. Depending on the situation, people may also get joint loans with their kids or other family members.
One very common point of confusion is about the difference between a co-borrower and a co-signer. After all, both involve having more than one person sign on a loan. The major difference is who has access to the assets.
Co-signers do not have any access to the assets of a loan, whether that is home ownership, a car, or money. By contrast, co-borrowers do have access to the proceeds of a loan.
But both co-signers and co-borrowers are responsible for making payments. But there is a slight difference. A co-signer will typically only pay the loan if the primary borrower can’t or doesn’t make payments. By contrast, co-borrowers are just as responsible for payments as the primary borrower right from the start.
Speaking of payments, whether you get a co-signer or co-borrower, making on-time payments will affect all parties’ credit scores. So, agreeing to get a joint loan with someone means you are trusting them to either make their agreed payments or tell you when they won’t so you can step in.
Most people who get a co-signer will do so because they need to in order to be approved for a loan or to get better rates on the loan. As such, it is more common to get a co-signer if your credit score, income, or debt-to-income ratio is less-than-stellar. In that situation, your co-signer’s higher income, DTI, or credit score will make up for yours.
Their better score can be the difference between even being approved for a loan. In other cases, it may just help you get a better interest rate. Even a small difference in interest rate can lead to significant savings, especially on a mortgage.
You can get a co-borrower in a similar situation, but it is more common to choose a co-borrower over a co-signer if you want both parties to benefit from the loan. For example, married couples or long-term partners will likely get a joint mortgage. Or two business partners may take out a joint personal loan.
Importantly, people don’t always get co-borrowers because they need one for approval or a better rate. It is very common for people to have joint loans simply because they want to share the asset. A classic example is when spouses want to have equal ownership of a house or car.
If you won’t be approved for a loan yourself or want to get a better rate, then there are a few main considerations that will help you choose between a co-signer and a co-borrower. First, you need to think about who will primarily be responsible for the payments. If both of you will make payments, then co-borrowing may make sense. If making payments will be your responsibility only, then consider co-signing.
More importantly, you need to decide who has access to the house, car, or funds from the loan. If you want the person who signs the loan with you to have access, then you need to make them a co-borrower. If they won’t have access, they should be a co-signer.
As mentioned, a co-borrower shares responsibility as well as ownership of the loan. This means that co-borrowers will own half the home. If the house is sold, you would both be entitled to the profit. But you need to keep in mind that the deed will also affect things. To prevent complications, co-borrowers are usually on the property deed for a home, as the deed is what defines ownership. But because of this, most people won’t agree to be a co-borrower unless they are also on the deed.
As mentioned, the deed or property title is what technically outlines who owns the property, and co-borrowers almost always appear on these. But you can also put someone on the property title even if they aren’t on the loan. This would give them the benefits of home ownership without any responsibility. For example, a parent may put their child on their property deed without having them be a co-borrower.
The rights of co-borrowers to cars are very similar to those of homeowners with joint mortgages. Both co-borrowers have equal rights to the car. This means that if you were to sell the car, both people would be entitled to the funds.
It also means that neither co-borrower can sell the car without the permission of the other. So, if you decide to get a co-borrower on your auto loan, remember that you will need their permission to sell the car. But you can also rest easy knowing that they can’t sell the car without your permission. As you are co-owners of the vehicle, you each require the other person’s permission to sell it.
If you are thinking of getting a joint loan or co-borrowing, then you always need to have a clear conversation with your fellow borrower. Make sure that you agree that co-borrowing is the right choice as opposed to co-signing or one of you just shouldering the loan.
You should also make sure you understand how you will split the payments, as you are both responsible for them. Will you alternate months? Will each pay a portion toward each month? Or will one person pay all of it most of the time, with the other person serving as a backup? Whatever setup you choose, make sure you are on the same page.
Don’t overlook the importance of discussing the loan with your co-borrower thoroughly. Remember that it will affect the credit scores of each of you, and you will share ownership of the home or car.
Of course, you will also want to do the same things you would do before applying for a loan in any situation. Check your credit score and report, ideally a few months in advance. This gives you time to challenge any errors or even potentially boost your credit score.
Avoid opening a new line of credit or taking out another loan right before applying for a home mortgage or car loan, as that hurts your debt-to-income ratio. Gather the required paperwork, such as pay stubs, W-2s, or other proof of income, ahead of time.
A co-borrower shares the responsibility of paying for a loan, and they also have equal rights of ownership to the loan itself. If it is a home or car loan, neither co-borrower can sell the asset without the permission of the other. Co-borrowing with someone is a long-term financial decision, so you need to trust your co-borrower.