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What Is A Co-Borrower, And How Are They Different From A Co-Signer?

Hanna Kielar5-Minute Read
October 27, 2021

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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.

Let’s discover what it means to have a co-borrower, and let’s uncover the benefits and drawbacks of co-borrowing. Rocket Loans℠ doesn’t currently offer the option to co-borrow on an unsecured personal loan, but we want to keep you informed of all your borrowing options.

Co-Borrower Meaning

A co-borrower is someone who applies for a loan with another borrower and shares equal responsibility for the loan’s repayment. In most cases, the co-borrower and primary borrower also share the title for the home, vehicle or other asset the loan pays for. Having two borrowers on a loan increases the chance of receiving a preferred interest rate and larger loan amount, because a lender is being repaid by two sources of income.

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

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

What Is A Co-Applicant?

Co-applicant is another name for co-borrower. A co-applicant is a secondary borrower to the primary borrower of the loan, though both borrowers are equally responsible for paying back the shared loan.

How Co-Borrowing Works

A loan with co-borrowers is often known as a joint loan. Common joint loans include mortgages, auto loans and personal loans. In a co-borrowing situation, both applicants will undergo a credit check. 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 place – often a checkbox that reads “joint” or “co-application” – where you can specify that you are co-borrowing a loan. Selecting this can ensure the lender requests the necessary information from both parties.

In addition to sharing responsibility of the loan, both applicants 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 any asset purchased with them.

However, as mentioned above, co-borrowers are united on a loan together, and a missed payment by either co-borrower can affect the other in a major way.

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

The bottom line? If one borrower suddenly faces financial hardship, it could directly affect their co-borrower and any assets they own together.

When Does Having A Co-Borrower Make Sense?

The reason a lender thoroughly checks repayment and credit history is so they can determine how likely or unlikely a borrower is to repay a loan. Before issuing a loan, a lender wants assurances that they’ll be fully repaid, so a borrower who poses a higher risk is often subject to a higher interest rate – if they’re approved at all.

Having a co-borrower on a mortgage or another kind of loan can mean less risk, in a lender’s eyes, and possibly improve your chances of qualifying for a good interest rate and larger loan amount. If you carry a low credit score or a high DTI, pairing up with a co-borrower who boasts a higher score and lower DTI can equal out to a better average than you would have on your own.

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 income could possibly net them a larger loan with better rates.

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

Co-Borrower Vs. Co-Signer

Co-signing a loan is often confused with co-borrowing, but co-signing a loan comes with significant differences in responsibilities.

Co-signing a loan makes you financially responsible for repaying the loan if the primary borrower misses a payment or defaults. When the loan is issued, however, only the primary borrower is responsible for making payments. The role of a co-signer is to assure a lender of repayment one way or another.

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

Co-signing 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 co-signer stands to have their credit score damaged if they, too, have trouble paying the loan.

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 a lower APR and interest rate as well as a higher loan amount.
  • 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 a hit on their credit score in the event of a default.
  • Co-borrowing can put strain on a relationship if one of the parties fails to make their payments.

FAQs About Co-Borrowers

Is a co-borrower an owner?

Yes, a co-borrower will typically own an equal share of the asset purchased with the loan and be equally responsible for repayment. Moreover, a co-borrower also shares the same credit risks if they fall behind on their monthly payments.

Does it matter who is a borrower or a co-borrower?

Generally, it doesn’t matter who is listed as the co-borrower or the primary applicant on a loan, since both share a claim to the asset and responsibility for repaying the loan. A lender may determine one applicant as the “primary borrower” if they have the higher income between the two.

How do I remove a co-borrower from a loan?

You can remove your co-borrower or yourself from a loan by requesting this from the bank or lender, or by refinancing the loan as a single applicant. Co-borrowers could also agree to sell the asset, removing both of them from the loan.

Final Thoughts

Despite the risks, co-borrowing can help you get the loan you want – with preferable rates and terms. Be sure to consider your financial situation, and your potential co-borrower’s, 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 doesn’t currently offer co-borrowing or co-signing on unsecured personal loans, but you can still see what you may be able to qualify for as the sole borrower. Start the loan application process today with Rocket Loans for access to your personal loan options.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.