Co-Borrower vs. Cosigner: What’s the Difference
While the terms cosigner and co-borrower often get used interchangeably, there are key differences between them. A cosigner agrees to repay the loan in the event the primary borrower defaults on it. However, they don't receive any direct benefit from the funds as the loan is taken out for the sole purpose of the primary borrower.
A co-borrower, on the other hand, takes out the loan with someone else, oftentimes for a shared purpose, like a home improvement project or a vacation, for example. Both borrowers have equal ownership of the loan funds and work together to pay them back.
When is a cosigner a good idea?
There are certain situations in which a cosigner makes sense, including:
- Emergency expenses: If life throws you a curveball and you have to repair your car or pay for a medical bill, you might want to find a cosigner so you can take out a personal loan and cover your emergency expenses. This is particularly true if you have bad credit and are unable to get approved on your own.
- An expected increase in income: Let’s say you’re a college graduate with a job lined up. If you want to borrow money to furnish your new apartment, a cosigner loan may be a good option. It can bridge the gap between your current low income situation to a future with a steady income where you can afford to make payments on a loan.
- Debt consolidation: A personal loan may be a smart choice if you want to consolidate high-interest credit card debt and lock in a rate that’s lower than the rates you’re paying now. It may save you hundreds or even thousands of dollars in interest.
When is a cosigner a bad idea?
Sometimes, a cosigner can do more harm than good. Here’s when you should avoid one.
- Unstable income: If you don't have a steady income and believe you might default on your loan, you should forgo a cosigner. You may damage your relationship with them if they have to take over and make your payments.
- Other options are available: It’s not a good idea to take out a cosigner loan if there are other ways you can borrow money. If you can tap into your home equity, for example, it’s better to pursue a home equity loan or a home equity line of credit (HELOC) that doesn’t involve anyone else.
- The loan proceeds benefit you and the cosigner: Imagine you live with your significant other and want to remodel your kitchen. In this case, you’d be better off asking them to be your co-borrower because the loan would benefit both of you and you can work together to repay it.
How to Get a Personal Loan With a Cosigner
These are the typical steps you’ll need to take to qualify for and apply for a personal loan with a cosigner.
- Find the right cosigner: Look for a trusted family member or close friend that you communicate with on a regular basis. This individual should have your best interests in mind and accept that they’ll be liable for the loan if you default.
- Shop around and compare options: Do some research and find lenders that offer cosigner loans. Then, compare the interest rates, terms, fees, and perks of all your options. Our list of lenders is a great place to start.
- Gather documents: Once you decide on a loan, you’ll need to collect documents like your pay stubs, bank statements, tax forms, and government-issued ID. You may have to ask your cosigner to share their documents so you have them on hand as well.
- Fill out an application: Fortunately, most lenders will allow you to apply for a personal loan with a cosigner online. Be sure to fill out your application carefully and double check your work to avoid delays with approval and funding.
- Wait for approval: Depending on the lender, you can expect a decision the same day you apply, within 24 hours, or in a few business days. They’ll likely notify you via phone or email.
- Sign the agreement: Upon approval, you’ll receive a loan agreement. Review it closely and ask your lender for clarity if something doesn’t make sense. Then, sign on the dotted line and you’ll be good to go.
What Happens If You Can’t Pay Back a Cosigned Loan?
If you can’t repay a cosigned loan, your cosigner will be responsible for it and both of your credit scores will take a hit. In a perfect world, they’d cover your payments and there won’t be any hard feelings. The worse case scenario is they’re unable to repay your debt and the lender sues you. Since the consequences of defaulting on a cosigner loan are extreme, do not take one out unless you’re confident you can pay it back.
Tips on Choosing a Cosigner for a Personal Loan
Almost anyone can be a cosigner but that doesn’t mean you should ask Joe Shmo across the street. Here are some pointers to help you find the best cosigner.
- Consider who you trust: It’s important that you trust your cosigner and they trust you back. Think about a family member, friend, or even mentor with solid credit and income that might be a good fit.
- Have a serious conversation: Once you know who you’d like to be your cosigner, sit down with them and explain your situation. Make sure they know why you need them to cosign, what you plan to do with the loan proceeds, and how you’ll repay what you borrow. It’s also vital that they agree to take over your loan should you fail to make your payments.
- Work together: If your potential cosigner accepts the responsibility of cosigning a loan, find a lender and apply with them. This way they are closely involved and there are no unwanted surprises.
- Have a plan B: Ideally, you’ll find a cosigner without any issues. But in the event you’re unable to, you’ll need to explore other options. You may have to settle for a loan with higher rates, choose a home equity loan, or simply delay your purchase and save up the cash.
Secure the Funding You Need with a Cosigner
If you can’t get approved for a personal loan with favorable rates and terms because of your credit or income, a cosigner can make your life easier. Just make sure they’re someone you can trust and you feel confident you’ll be able to repay your loan. Otherwise, you may ruin your relationship with them and damage your credit.