A co-borrower is exactly what it sounds like – an additional borrower on a loan. The co-borrower’s name, credit history and income appear on the loan documents, along with the primary borrower’s information. The purpose of a co-borrower is to help the primary borrower qualify for a loan. Both the primary borrower and the co-borrower are obligated to repay the loan. In the case of a mortgage, the names of the co-borrowers are also the names of the owners on the title.
A Shared Responsibility
The responsibilities to pay as well as the ownership of the asset are both shared by the primary borrower and co-borrower. Co-borrowers are often joint applicants. Much of the time, co-borrowers are spouses or couples. One of the main reasons for co-borrowing is two people may qualify for a larger loan than they could qualify for individually.
The primary borrower may need the financial stability of a co-borrower in order to qualify to receive a loan. As mentioned before, having two signers may qualify for a larger loan amount. It comes down to qualifying for a loan in general and the desired loan amount.
Is It Worth the Risk?
Because the primary borrower and the co-borrower have equal responsibilities, the risk of co-borrowing can be higher. The primary borrower may take on a higher burden than they can manage if the co-borrower was used to increase the loan amount. If one of the borrowers has poor credit, this can affect the interest rate for the worse. An individual with good credit may be better off taking out a loan on their own to secure a better interest rate.
If you’re considering signing on as a co-borrower, make sure you fully understand your responsibility.