The Difference Between a Co-Borrower and a Co-Signer
Co-Borrower: Are you looking at co-borrowing with your spouse or business partner? Sharing ownership of an asset may seem like a good idea when you decide to make a purchase, but you could hurt your relationship if something goes awry when you’re making payments.
Now that we’ve stated the obvious, let’s take a look at the difference between co-borrowing and co-signing. Both involve two parties taking some responsibility for the debt and can positively or adversely affect the credit scores of each party. That sums up the similarities.
Before we get into the differences, if you’re looking for ways to pay off credit cards or existing loan balances, apply for a debt consolidation loan before asking a co-borrower or co-signer to help you. There’s a good chance you won’t need either to get out of debt.
Co-borrower scenarios: pros and cons
The most common scenario for co-borrowing is home ownership. When two spouses buy a house together, the typical arrangement is to put both of your names on the mortgage. That gives you equal responsibility for making payments and equal ownership of the home.
This is an obvious pro if the couple stays together through the life of the loan. In cases of divorce or separation, it gets a little sticky. Both parties are still responsible for payments and will be jointly penalized if those payments are not made.
Another fairly common co-borrowing situation is when business partners decide to pool their resources to buy property, equipment, or even shares of another company. If you do this with shared debt, both parties are equally responsibility.
In other words, with co-borrowing, both parties have legal rights of ownership and equal responsibility for the debt. If you choose this route, make sure your relationship with your co-borrower is solid. You’re taking all of this on together.
Co-signer scenarios: pros and cons
If you have children, you might be familiar with this scenario. Junior wants to buy a car and can’t afford it, so he comes to Mom and Dad to co-sign his loan. We know, deep down, that he might default on his payments, but we sign off on it anyway. Then, we get stuck with the debt.
Okay, so maybe I’m a skeptic—I know it doesn’t always happen like that. Co-signing a loan for someone with a lower credit score and limited credit history can help them get a leg up in life. We do it for our kids and sometimes we get talked into doing it for other relatives or close friends.
When the primary borrower makes their payments on time, all is well, and we move on to bigger and better things. But if the primary borrower defaults, the co-signer assumes responsibility for the debt. If you’re the co-signer, your credit score can also take a hit for late and missed payments.
Sadly, after going through months and years of stress and risk to your own credit score, as a co-signer, you won’t have any ownership rights over the asset when the loan is paid off—even if you had to make those payments yourself. Welcome to parenthood.