Cosigners
A cosigner is someone who takes the guarantee of a loan for someone who isn’t able to qualify on their own.
Legally, the co-signer is liable to repay the debt if the primary borrower fails to make the due payments.
For example, if the primary borrower isn’t able to get approved for an auto loan owing to a low credit score.
If they can bring in a co-signer, the lender will take into account the cosigner’s income and credit records, and approve the loan if the cosigner satisfies the necessary criteria.
However, things to consider are:
- Although cosigners help you get approved for a loan or lower rates, they don’t have any ownership of how the primary borrower uses the money.
- They’re liable for payments and additional charges if the primary borrower defaults.
Co-borrowers
A co-borrower is considered as a primary borrower.
This individual will be equally responsible to repay the debt and have the same level of ownership of the funds or the assets purchased with the money.
For instance, when you get a car loan as a co-borrower with your friend, both you and your friend will have your names on the car’s title.
If you’re taking out a high-value loan, the lender takes into account the debt-to-income ratio of all borrowers, thus increasing your chances of getting approved or accessing better rates and terms. A co-borrower is a part of the entire process - from beginning to end.
They own the asset equally and are liable to make timely payments.
Two Lenders Are Better Than One
When you have a lower credit score or a higher debt-to-income ratio, most lenders will hesitate to approve your loan application.
Still, bringing in a cosigner or a co-borrower helps improve your chances of approval given the lender will now have an extra guarantee on the returns.
- A single borrower may not be sufficient, but a cosigner or a co-borrower with a good score will reassure the lender that the debt balance will be repaid.
- The lender understands that a cosigner or a co-borrower is legally liable to repay the debt and any additional charges. So, they’ll be inclined to approve a loan given they’ll have not one but two guarantors.
What To Look Out For?
The obvious benefit of getting a cosigner or a co-borrower is quicker loan approvals and better interest rates.
However, there are certain drawbacks to it as well:
- A co-borrower will have equal ownership of the asset. They have the right to recommend or use the money as they deem fit.
- A cosigner doesn’t have a say on the utilization of funds, but they’re liable to make payments on your behalf if you default. This can lead to bad relations with the person who guaranteed your loan if you default.
- As a primary borrower, your credit score will be impacted and delinquency will harm your history, thus making you ineligible for future loans or better rates.
Which One Is Better?
Choosing the right option largely depends on your situation.
- Say you want to buy a new car, but your credit score isn’t good enough. You can use a family member as a cosigner. In this case, you’ll be the sole proprietor of the vehicle. This is a good option if you’ve got a stable income and a manageable debt-to-income ratio.
- If you want to buy a new car, but your monthly expenses are high, you can get a co-borrower who’ll own the car as much as you do. They’ll be considered as the primary lender and will be liable to make joint payments. This option is a preferred choice when both parties are agreeing to a joint right on the asset.
Conclusion
When you have a bad credit history and want to take out a loan, either of these options will work in your favor.
Just make sure that you discuss the responsibilities and liabilities with the interested party.
If you want to keep the ownership of the asset, it’s best to choose a cosigner whereas if you’re comfortable sharing the ownership and responsibility, choose a co-borrower.
