A co-borrower or a co-signer can help you get a loan, but only a co-borrower is your equal on the loan. A co-borrower is a partner who applies for the loan with you. A co-signer signs after you've filed your loan application, agreeing to be your backup if you don't make the payments.
Finance companies and banks calculate loan limits by dividing your total recurring debts by your gross income, to determine your debt-to-income ratio. If you need a larger loan than your ratio allows, a co-borrower gives you an advantage. The co-borrower's income and debts count as if you are a partnership. A co-borrower can also contribute payments on the loan and upkeep costs for the purchased item. The co-borrower usually shares responsibility for the item and shares the title.
Protection From Default
When you apply for a loan, the bank or finance company may refuse to lend the requested amount because of your lack of credit history or short time at your job. The lender may approve your loan with the added signature of a co-signer, which provides a second layer of protection from default. If you don't make payments, the co-signer agrees to pay the loan. If you're young and need a loan, the co-signer helps you get where you want to be — maybe with new wheels or back in school.
Having a friend or parent co-sign on a loan may ruin a good relationship if you don't make the payments. The co-signer trusted that you would make payments and he would never need to pay. If you lose your job or can't work, the co-signer gets stuck with a payment and nothing to show for it. If you are considering the role of co-signer, be fully aware of the risks before you sign. Signing as a co-signer can affect your ability to get your own financing, as the loan shows on your credit report until it's paid.
If you are a co-borrower, you are a co-owner. You share the loan proceeds and are likely named on the title for the purchase. If the debt is a mortgage loan, both co-borrowers benefit from the federal income tax interest deduction. Co-borrowers are equally liable for the full amount of the loan. If something happens to one co-borrower, the other one is legally bound to make the payments. In return, the deed may give you full ownership upon death of the co-borrower.
Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.