Cosigning vs. Co-borrowing: What's the Difference?

These words are very common in the word of finance, and they are sometimes mistakenly used interchangeably. But there is actually a very big difference between a cosigner and a co-borrower, so it’s important to distinguish between them.

Let’s talk about the difference between cosigning and co-borrowing.

What is a cosigner?

A cosigner is someone who agrees to be legally responsible for a loan if the original borrower defaults on the payments. Cosigners essentially give the lenders a guarantee that someone else will be responsible for the payments should the loan agreement not work out as intended.

Cosigners can be found on apartment rental agreements, personal loans, mortgages–really any type of loan or rental agreement. If a borrower is young and has yet to establish credit it is common for a parent or loved one to step in and cosign until the borrower has built up their credit. If a borrower is just getting out of a bad situation such as a bankruptcy a cosigner may be able to help them get back on their feet. 

Many car lenders have the following requirements for a first time car loan:

• You must have a monthly income of at least $1,600.
• You must make a down payment of at least 20%.
• You must have a credit score of at least 680.
• You must have established credit and not have a credit utilization ratio that is higher than 50%.

Lenders may require proof of a stable work history in addition to this. If you are a first time car buyer, these may seem like difficult requirements. Lender’s will therefore allow you to get a loan if you provide a cosigner.

There are a few requirements to become a cosigner on an auto loan:

1. They must be willing to cosign and accept the responsibility of repayment if necessary.
2. They must have good credit, generally above 700.
3. They must prove they have a stable income that can pay for the loan if it defaults.
4. They must prove their residence.
5. They must prove their employment.

Lenders will consider all of this information in conjunction with the original borrower’s application materials when determining whether or not to approve the loan. 

Becoming a cosigner is a huge responsibility. You should only cosign a loan for someone you love and trust. It is all too common for financial relationships to put a strain on personal relationships, so it’s very important to communicate with your loved one if you decide to cosign with them.

What is a co-borrower?

A co-borrower on the other hand is someone who is applying for the same loan with you. You are agreeing to equal share in responsibility of the loan and of the asset. Your co-borrower’s name will appear next to yours on the loan and on the title of the car. Your finances will be looked at with equal weight. 

A co-borrower is a good idea if you want to own your car with someone, such as your husband or wife. They will have equal ownership, which may be perfect for you. 

Is it good to have a cosigner?

In general, cosigning a loan is a very big deal and it is a decision that should not be taken lightly. But if you are having trouble getting approved for a car loan, asking a loved one might be your only option. Having a cosigner will help you in the following ways:

• You will be offered a better interest rate
• You will have some time to build credit
• You will have someone to help guide you and give you advice

But being a cosigner for someone else doesn’t really have a lot of benefits for the other person, and asking someone to cosign a loan is a big deal. 

• They are on the hook financially for your loan.
• Insurers in some instances will hold the cosigner responsible for claims.
• It can be a strain on personal relationships.

Before asking someone to take on this responsibility, ask yourself if you really need the loan (i.e. do you really need to buy a new car). 

If you are trying to build credit and are confident that you will not default, then you should take the following steps to prepare for cosigning. 

• Prepare ahead of time before you ask them to cosign. Gather your financial information so that you can answer any questions they may have.
• Schedule a meeting to ask them and discuss in detail. Having a meaningful and honest conversation ahead of time is important. 
• Make sure they are aware of what being a cosigner means.
• Get a plan in place for repayment. This will help assure them that you can pay back your loan.
• Don’t expect an answer right away. Give them time to think about what you are asking. 

If your cosigner agrees, it’s important that you keep them in the loop on whatever is happening with your loan. If you need help with a payment or have a problem, be transparent with them. 

How can I remove a cosigner?

If you have a cosigner, you may be wondering if it’s possible to remove them. Generally there are three options to get untangled from a cosigner:

Ask for a cosigner release.

In certain situations a lender may allow you to simply release the cosigner from the loan. This is not typical, but it can happen in certain situations. Read your loan agreement carefully to determine if this is an option.

Sell the car.

You can also simply sell the car and get a fresh start. This is a good option if the arrangement doesn’t seem to be going well and you have not been able to improve your credit enough to refinance the loan in your own name.

Refinance your loan.

The best way to remove a cosigner is to refinance your loan. When you refinance you are starting over with a new loan, so your new lender will pay off your old lender. If you have worked to improve your credit, you may be able to find a car loan with a good interest rate and repayment plan. Working with a company that specializes in refinancing can help you navigate these waters.

That’s everything you need to know about cosigning and co-borrowing.

Both cosigning and co-borrowing are very serious financial relationships, although they differ on what they actually are. Both relationships should be taken seriously and a lot of thought should be put into the decision beforehand.

Refinancing your loan is a great way to either add or remove a cosigner or co-borrower. If you are looking to make a change on your car loan, contact Auto Approve today.

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