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What Is A Co-Borrower, And How Is It Different From A Cosigner?

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If your credit score just won’t cut it for the loan you need, you may want to consider phoning a friend. That is to say, you may want to bring a co-borrower in on the loan with you.

The article below will discuss what it means to have a co-borrower, as well as the benefits and drawbacks of co-borrowing.

Co-Borrower Meaning

A co-borrower, or co-applicant, takes on equal responsibility for a loan with the primary borrower. Co-borrowers are more likely to receive preferred interest rates and larger loan amounts, as lenders are being repaid by two sources of income.

The reason lenders thoroughly check your repayment and credit history is to determine how much of a risk a borrower may be for repaying a loan. Lenders want assurances that they’ll be fully repaid before issuing a loan, so borrowers that pose higher risks may be subject to higher interest rates, if they’re approved at all.

How Co-Borrowing Works

A loan with co-borrowers is often known as a joint loan. Common joint loans may include mortgages, auto loans or personal loans. In a co-borrowing situation, both applicants will undergo credit checks. The lowest median credit score and the average debt-to-income ratio (DTI) between the two applicants will determine the loan’s rates and terms.

Once a joint loan is issued, both applicants become responsible for repaying the loan. Many loan applications may have a section where you can specify that you are co-borrowing a loan, often a checkbox that reads “joint” or “co-application.” Selecting this can ensure the lender requests the necessary information from both parties.

In addition to sharing responsibility of the loan, both applicants also share ownership of the funds, and any asset purchased using the loan. For example, with an auto loan, both parties have the right to drive the vehicle. With a mortgage, they have equal ownership of the home. When co-borrowing a personal loan, each person has full access to the borrowed funds, and whatever is purchased with them.

Who Can Be A Co-Borrower?

Generally, a co-borrower should be a legal adult that you know personally. Typically, a co-borrower is a spouse or domestic partner, but it can also be a parent, sibling or other relative. A co-borrower can even be a friend that you trust and who stands to benefit from the loan.

Business partners may also co-borrow a personal loan when starting a business together.

Co-Borrower Vs. Cosigner

Cosigning a loan is often confused with co-borrowing, but there are significant differences in responsibilities when you cosign a loan.

Cosigning a loan makes you financially responsible for repaying the loan should the primary borrower miss a payment or default. When the loan is issued, however, only the primary borrower is responsible for making payments. The role of a cosigner is to assure a lender that they’ll be repaid one way or another.

A cosigner is typically someone who knows the primary applicant and who has a better credit history or higher income. As with a co-borrower, their presence can assure a lender their loan will be repaid. Unlike a co-borrower, though, a cosigner doesn’t have legal access to the funds, or any asset tied to the loan.

Cosigning a loan inevitably comes with the risk of the primary borrower failing to make their payments. By taking financial responsibility for the loan in their stead, a cosigner stands to have their credit score damaged if they, too, have trouble paying the loan.

When Does Having A Co-Borrower Make Sense?

Bringing in a co-borrower on a loan or a mortgage can improve your chances of qualifying for a good interest rate, and a larger loan amount. If you have a low credit score or a high DTI, having a co-borrower with a higher score and lower DTI can equal out to a better average between the two of you.

Co-borrowing also makes sense if both parties stand to benefit from the loan. For example, a couple buying a house or car together will both benefit from those assets, and their combined incomes could possibly net them a larger loan with better rates.

As mentioned above, business partners will also commonly take out a joint loan, as they both stand to benefit from their business venture and may be equally motivated to repay the loan.

Having A Co-Borrower For A Mortgage Loan

It makes perfect sense for spouses or domestic partners to co-borrow a mortgage loan, since it could get them the best loan deal and grant them equal ownership of the home. Being a mortgage co-borrower also puts your name on the title of the home, giving you complete property rights with the primary borrower.

Conversely, if you want your partner to have equal property rights without being financially responsible for the mortgage, you can add their name to the property’s title but keep it off the loan application.

Risks Of Being A Co-Borrower

As mentioned above, co-borrowers are united on a loan together, and a missed payment on either side can affect the other party in a major way.

In the event that one borrower fails to make their on-time payments, a lender may demand full repayment of the loan from either party. If even one borrower defaults on the loan, it can negatively affect the credit reports of both parties.

In short, if one borrower suddenly faces financial hardship, it could directly affect their co-borrower and any assets they own together.

Pros And Cons Of Co-Borrowing

Pros

  • A co-borrower can improve one’s chances of qualifying for a loan.
  • Having a co-borrower can earn you lower APR and interest rates, as well as higher loan amounts.
  • Both borrowers share the benefits and responsibility for the loan and the assets tied to it.

Cons

  • One borrower can become fully responsible for the loan if the other defaults or misses their payments.
  • Both borrowers stand to lose their collateral or assets, and take hits on their credit scores in the event of a default.
  • Co-borrowing can put strain on a relationship if one of the parties fails to make their payments.

Final Thoughts

Despite the risks, co-borrowing a loan can be extremely helpful in getting the loan you want, with your preferred rates and terms. If you and your co-borrower both stand to benefit from the loan, that’s an even better reason to sign together.

Be sure to consider the financial situations of yourself and your potential co-borrower before applying for a loan together. Co-borrowing only makes sense if your combined finances can get you a better deal than if you were in it alone.

Rocket Loans does not currently offer co-borrowing or co-signing on personal loans, however, you can still see what you may be able to qualify for on your own. Get preapproved today with Rocket Loans® to see your personal loan options.

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