Because the United States is not typically known as a nation of savers, many Americans must take out a loan when making major purchases. Those major purchases can include a new home, car, vacation, college education and other expensive items. A number of factors come into play when determining whether a person can qualify for a loan, including current debt, income, age, employment status and credit history.
For those who have trouble obtaining a loan on their own because of a poor credit history, lenders allow a co-borrower to also sign for the loan. A co-borrower can also be a spouse or family member making the purchase with the borrower. There are several differences and many similarities between a borrower and co-borrower.
A borrower is the person with full responsibility for paying back the loan, while the co-borrower is someone added to the loan often to assist the borrower with approval. The co-borrower takes on the risk that he may have to pay the loan if the borrower cannot.
What's a Borrower?
The borrower's responsibilities do not change with the addition of a co-borrower. The borrower is still responsible for repaying the entire amount of the loan in the time specified by the lender and laid out in the loan agreement.
The loan agreement generally requires a monthly payment from the borrower that includes principal and also interest, a fee the lender imposes for lending the money. Borrowers can incur late fees for not paying on time, and certain loans also come with a penalty for paying off the loan early.
When dealing with property loans, neither the borrower nor the co-borrower may have any financial stake in the property being purchased, meaning they cannot already own that property.
What's a Co-Borrower?
Often a borrower will use a co-borrower when he has poor credit and cannot obtain a loan on his own. For borrowers with good credit, having a co-borrower can allow for a larger loan amount since both parties' incomes and credit history are considered when qualifying for the loan. Co-borrowers can be a spouse, parent, adult child, other family member or even a friend.
The co-borrower has the same responsibilities and assumes the same risk as the borrower. If the borrower does not pay on time or defaults on the loan, the co-borrower is also responsible financially for that loan. When applying for the loan, the co-borrower's financial history and credit history are also taken into consideration for approval. As with the borrower, the co-borrower is responsible for making all payments on time and may have to pay a fee for any late payments.
What's a Primary Borrower?
In a joint loan, where there are a borrower and co-borrower, some lenders require that one of the borrowers be named the primary borrower. The primary borrower may be determined by whoever has the higher income or the primary borrower may simply be the borrower whose name appears first on the loan application. Each lender has its own criteria for determining who the primary borrower will be. Not every lender names a primary borrower, some simply use the terms borrower and co-borrower.
What's a Co-Signer?
When dealing with mortgage loans and borrowing money for the purchase of a home or property, there is such a thing as a co-signer, which is different from a co-borrower. The co-signer signs his name on the loan and his financial history is a factor in securing the loan. Borrowers sometimes get a co-signer, such as a parent, if their own income and credit history are not strong enough to qualify for the loan.
A co-signer is financially responsible for the loan but his name does not appear on the title and therefore he has no ownership interest or responsibility for the property itself. Whereas co-borrowers have a full ownership stake in the property being purchased, co-signers have only a financial stake in the mortgage being used to purchase the property.