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Cosigners are people who guarantee debt for someone who cannot qualify for a loan on their own. The understanding is that the primary borrower is the person legally responsible for repaying what is owed. Co-borrowers, on the other hand, are people who want to take on a shared debt with another person. The understanding is that co-borrowers will work together to repay a loan taken out for a joint purpose.
Before you agree to be either a cosigner or a co-borrower, you should learn a little bit more about the role you're taking on. The guide below will help you to better understand the difference.
Here are the main differences between cosigning and co-borrowing on a loan:
| Co-borrower | Cosigner |
|---|---|
| Takes on shared debt with someone else | Guarantees debt for someone else |
| Work together to repay debt | Legally responsible for debt payments if primary borrower doesn't pay |
| Debt has a joint purpose between borrowers | Debt taken out for sole purpose of primary borrower |
| Both borrowers are beneficiaries of loan funds | Cosigner receives no direct benefit from loan funds |
Cosigners are people who help someone to qualify for a debt when the borrowers could not otherwise get a loan.
The cosigner's credit and income are considered by the lender. If the cosigner is better qualified than the primary borrower, the loan may be approved when it would otherwise have been denied. Also, the primary borrower might get a lower interest rate than they would without a cosigner.
Typically, a cosigner has full legal responsibility for loan repayment if the primary borrower doesn't pay -- even though the goal is for the primary borrower to be the person who repays the loan. If the primary borrower doesn't pay, the cosigner could face ruined credit or collections activities.
In some cases, a cosigner would remain legally responsible for repaying debt even if the primary borrower passes away. However, depending on the loan agreement, the debt might be forgiven upon death or permanent disability of the primary borrower. This is one benefit of cosigning over co-borrowing. A co-borrower is held responsible for the loan even if their co-borrower dies or becomes disabled.
Cosigners can also sometimes be released from legal responsibility for the loan after the primary borrower has made a certain number of on-time payments. In most of these other situations, the only way to remove a cosigner's legal responsibilities would be for the primary borrower to refinance the loan once his or her credit has improved.
One big downside of cosigning is that the cosigner doesn't usually directly benefit from the loan. If someone cosigns for an auto loan, for example, the cosigner is unlikely to be named on the title of the vehicle. The cosigner wouldn't have an ownership interest in the car, even though they're legally responsible for payments on the car loan if the primary borrower stopped making them.
A co-borrower is someone who borrows alongside someone else. The co-borrowers usually both want and benefit from the loan, unlike in cosigning situations when the primary borrower wants the loan and the cosigner just helps them to get it.
Co-borrowers share responsibility for repayment in the eyes of the lender, just as cosigners do. But a co-borrower typically intends to share responsibility for making payments. When you cosign, usually the plan is for the primary borrower to make payments. But the cosigner offers to be responsible for the debt if the primary borrower fails to make payments to help them get approved for a loan.
If co-borrowers take out a joint loan to buy an asset, they also usually both have a legal right to the asset, in addition to a legal responsibility for paying for it. If two people are co-borrowers on a home mortgage, for example, they would both have their names on the title to the house.
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