The Difference Between Co-Signers and Co-Borrowers

So your credit application has been declined because of debt servicing. All you need is a cosigner, right? Wrong. Although each case may be reviewed on its own strength, a cosigner by definition is someone who is vouching for you on the assumption you can pay or service the debt on your loan. It is similar to someone putting in a good word for you but not taking responsibility to assist with the financial commitment each month. A cosigner does not mean that because they have great credit and income that you should be approved on those grounds. You, after all, are the one applying for the credit – not the cosigner.

Their income is not considered in the application toward servicing your debt – only your income. So if you don’t have the cash available monthly to service the new loan you are applying for, you likely won’t qualify even with a strong cosigner. Many young people who are desperate for a loan often think that if they have a cosigner with a strong credit rating (such as a financially solid parent) that is all that’s required for success. This couldn’t be further from the truth.

A cosigner adds strength to your application. If in the past you had some mild credit difficulties, i.e., for whatever reason your credit file may show numerous slow / late payments. A cosigner communiques to the lender that you have changed your ways and it’s all bad water under the bridge, and that you are able to meet your commitments going forward. If you are not, the cosigner will pay for you. Understand now that the bank isn’t as much concern about who pays, as long as they are paid. Your cosigner may be requested to obtain independent legal advice (ILA) before the bank will accept their signature in any legal way to your application.

What a Co-Borrower Is

So, what if the bank isn’t comfortable with your application because of more serious issues? Perhaps you started a new job, or have moved around a lot, or simply have no credit, or very poor credit, or very little credit history. Banks may be willing to review your application further with the strength of a co-borrower. A co-borrower agrees with you to share the responsibility of the debt equally.

Usually an account is set up in joint names of all the borrowers on the note from where the payment is to be taken. In the possible event of a nonpayment, the creditor can request full payment from all borrowers involved (also known as a joint and several guarantee). Each borrower and co-borrower’s income is taken into consideration to service debt, and adds much more strength to your application than simply having a willing cosigner. This is common for car purchases and mortgages. Banks usually like to ensure they have a backdoor should something turn wrong after the money has been loaned. In this case, the backdoor would be that the full payment could be demanded from any borrower on file, instead of the bank chasing down all borrowers for an equal portion of one guarantee.

So if you are ever in a position where you need a cosigner and you are requesting a cosigner from a family member, a friend, or a coworker (which I hope you never have to do), make sure that they understand that their credit rating is not on the line if you were to ever default on your loan payment. A cosigner is nothing more than somebody giving you a good word on your character.

Whenever someone is asked to be a cosigner the first thing they usually think is that they will be liable for any payments that are missed. This is not true. They are mistaking a cosigner for a co-borrower. Usually if you go to a bank with a cosigner in tow, the bank will try to convince you and the cosigner that they should become a co-borrower instead. Of course the bank is going to try to do this, but try to get your loan without a co-borrower status on your friend or family member.

In saying all of this, I want to stress the importance of not using a cosigner or co-borrower at all. Sometimes it is obviously necessary to use a cosigner or a co-borrower, but it should only be a last ditch attempt – a last resort.

Continued in the Carol’s Borrowing Series Category of Clf.