The Differences Between Co-Borrowers and Co-Signers

If you're applying for a loan but struggling to qualify, you might want help from a co-signer or co-borrower.

A lender accounts for the co-borrower's or co-signer's credit and income when evaluating you for a loan. That makes it easier for you to receive a loan and get a lower interest rate than you would if you were applying on your own. Here's a look at the differences between co-borrowers and co-signers -- and the pros and cons of each.

[Read: Best Personal Loans.]

What Is a Co-Signer?

A co-signer is another person who is legally responsible for repaying your loan if you don't. Despite this obligation, the co-signer has no ownership stake in the property.

This means the co-signer's name is not added to the title of your home or car, but the co-signer's credit -- and your credit -- would be harmed by missed payments.

A co-signer is often a spouse, parent or friend because of the risk involved, says Malik S. Lee, managing principal at Felton & Peel Wealth Management, which has offices in Atlanta and New York City.

A child might have a parent co-sign a student loan or mortgage and then later refinance to remove the parent's name.

What Is a Co-Borrower?

A co-borrower not only shares legal responsibility for your debt but also has legal rights to your asset, unlike a co-signer. If two people are co-borrowers on a mortgage, for example, both would have their names on the title to the house.

Co-borrowing situations could include spouses or couples taking out mortgages, partners obtaining business loans, or parents and kids getting car loans.

Co-borrowers, or co-applicants, apply separately. A relative or friend who is willing and able to contribute to a mortgage but who will not live in the home is called a nonoccupant co-borrower.

[Read: Best Mortgage Lenders.]

When Does Co-Borrowing Make Sense?

Co-borrowing -- and co-signing -- can make qualifying for a loan at the best rates easier. But co-borrowing takes the commitment one step further and can offer more assurance to a lender and co-borrower.

"With a co-borrower, the lender feels like it's less risky to have two co-borrowing instead of one (borrower), especially when it's a large item like a mortgage," says Rianka Dorsainvil, co-founder and co-CEO of 2050 Wealth Partners, a virtual financial planning and wealth management firm.

If you are taking out a loan with a spouse or business partner, co-borrowing makes the most sense when you have a common goal and shared ownership of the asset.

"You typically don't benefit from the asset being a co-signer," Dorsainvil says. "It's more to help someone out -- such as a family member or friend."

If a friend or loved one asks you to co-sign a secured loan, you might want to insist on being a co-borrower in case the primary borrower skips payments and becomes hard to reach.

"If it's an asset, then yes, you probably want to be a co-borrower," Lee said. "If you're going to put your credit on the line, your assets on the line -- because they could come after you and your assets -- you probably want some skin in the game with the asset."

One scenario that could come back to haunt a mortgage co-signer is if the primary borrower dies and the co-signer inherits the payments but not the property.

"If the primary borrower passes, it could be a nightmare if you're a co-signer," Lee says, because your name is not on the title of the property.

[Read: Best Private Student Loans.]

What to Know Before Co-Signing or Co-Borrowing

Co-signing and co-borrowing place heavy responsibilities on all involved. Here are a few ways to prepare for some of the legal and ethical challenges:

Discuss what-if scenarios. Borrowing with your business partner or boyfriend might seem ideal. But if your relationship ends, one person might neglect the payment and not care how it affects the other's credit score, Dorsainvil says.

You would need to refinance to remove a co-borrower's name from a loan, but that might not work either. "You may be stuck with a bigger payment that you cannot afford on your own," Dorsainvil says.

No one wants to plan for a breakup, but doing so could help you avoid a financial mess. A couple in a co-borrowing situation, for example, could agree to a certain timeline for listing the property after a split.

This exercise works best when you both value your credit record.

Consider your credit plans. When you agree to co-sign or co-borrow, you might forget about it until it comes up during a different loan application process: yours.

Dorsainvil says one of her clients co-signed a car loan for a sister, who said she would pay it off quickly. But years later, it still appeared on the client's credit record and prevented him from getting a mortgage until she refinanced the loan and removed his name.

"You need to understand the goals you have for yourself financially," Dorsainvil says. "How does being a co-borrower or co-signer affect your personal financial goals?"

Build a communication strategy. Your co-signer or co-borrower will need to know when you make payments and if you hit financial setbacks.

"You almost have to take the role of being the financial steward and making sure the person is paying on time because it ultimately affects you and your ability in the future of applying for a loan yourself," Dorsainvil says.

If you are a co-signer or co-borrower, you can:

-- Ask the lender to notify you if the primary borrower is not making payments.

-- Request access to the loan account to monitor it.

-- Set up a timeline for when the loan will be repaid or refinanced.

-- Encourage the primary borrower to let you know if he or she runs into financial trouble and can't pay off the loan.

If you are asked to be a co-borrower or co-signer, you will also want to make sure you can handle the entire debt yourself. You never know what might happen.

"You do things because you're a good person and have a good heart. You want to help family and friends," Dorsainvil says. "In the back of your mind, be ready to take on that risk. Not only is the lender taking on that risk, you're taking on the risk as well."