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Co-Signer vs Co-Borrower

May 26, 2023

Understanding The Differences Is Key To Making Good Financial Decisions

Have you ever been asked to be a co-signer or co-borrower on a loan for someone you know? This can be a difficult financial decision to make, as you most likely want to help your loved ones but are unsure of the potential risks. If so, here are some key points to note about becoming a co-borrower, co-signer, or non-borrowing owner.

Young man signing a contract.

Why would someone need a co-signer or co-borrower?

Typically, someone who is new to needing a loan, and has not established a credit score might need a co-borrower or co-signer to add strength or security to their loan application. The same goes for someone who may have had some trouble in the past and has a damaged credit score.

At First Source, we believe that sometimes bad things can happen to good people, so your credit score is not the only factor that determines if you will be approved for a loan here. We work with our Members to find the best possible solution for their needs. A loan should be affordable and secure for repayment before it can be approved. A lender may ask you to provide someone as a co-borrower or co-signer if your loan application appears to need added reinforcement for repayment or collateral needs. 

What’s the difference between signers and borrowers?

  • Co-Borrower: A co-borrower shares equal ownership of the collateral or assets securing the loan. This borrower will be equally responsible for making payments. The loan will be recorded on the co-borrower’s credit report and will impact the co-borrower’s credit score just as it would the primary borrower. 

  • Here is how a co-borrower can assist with a loan application:

    • The Credit score of a co-borrower could have a positive impact on the loan’s interest rate if they have a better credit score than the primary borrower.

    • The co-borrower adds financial support to the primary borrower. A lender may deem the loan request unaffordable to just the primary borrower and will ask for a co-borrower and proof of their income to reduce the risk of non-payment.

    • Becoming a co-borrower on someone’s loan can result in becoming a joint owner on the affiliated deposit account. Make sure that you understand the responsibilities of becoming a co-borrower before agreeing to the terms. The borrower should also consider the potential risks of adding this person as a joint owner on their account. 

  • Co-signer: A co-signer does not share equal ownership of the collateral or assets used in securing the loan. A co-signer is simply to assist in securing the affordability and repayment of the loan. This could be a much harder position to be in because a co-signer is just as responsible for the loan as the primary borrower, but will not have rights to the vehicle, boat, or other assets being purchased by the loan proceeds. The loan will be recorded on the co-signer's credit report, and it will affect their credit score just as it would the primary borrower.

Another kind of borrower that you may not be familiar with is a:

  • Non-Borrowing Owner: This is someone who owns the collateral or asset securing the loan but is not an actual borrower or signor. This means they are not responsible to pay back the loan, and it will not appear on their credit report. 

    • Example: Mr. and Mrs. Smith are buying a new car, but the only applicant for the auto loan is Mr. Smith. They will both own the vehicle when they register. In this case, Mrs. Smith will be listed as a non-borrowing owner on the loan documents but will not be responsible for the repayment of the auto loan.

If someone is the owner or part owner of a piece of collateral being offered to secure a loan, the loan cannot be placed on the collateral without the current owner(s) signing as a non-borrowing owner. If the loan is not paid as agreed, the collateral could be repossessed.

If you knew the situation would play out in an unfavorable manner for you and your credit score, you probably would not cosign that loan. But how do you know ahead of time how the person you are trying to help will handle the responsibility of a loan?

Whatever the reason for the request to be a co-borrower or co-signer, ask yourself the following questions before signing on the dotted line:

  • Why can’t the primary borrower qualify themselves? A low credit score could be the result of bad repayment history, or it could mean that the borrower is simply new to borrowing and hasn’t established a solid credit history yet.

  • Will you be able to repay the loan if the primary borrower defaults?

  • Are you prepared to face the potential credit and financial implications that can occur if the primary borrower can’t make ongoing payments?

  • If the loan request is long-term, will this inhibit you from getting your own financial assistance? A good rule of thumb is that you should only borrow what you need. Having extra loans you don’t need on your credit report can be a liability in that you may not be able to afford a new loan until the one you are listed on is paid in full.

  • How long have you known the primary borrower? What is your relationship? Can you trust them to protect the credit score you have worked so hard to build and to assure you won’t one day become responsible for their debt?

Live Smarter

For more information about co-signing, view this article from Balance Financial Fitness. You may also speak to one of our friendly Financial Service Representatives by calling 315-735-8571 or scheduling an appointment online today. 

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