When taking out a car loan or refinancing a car loan, using a co-borrower may be an option worth considering. Let’s take a look at exactly what a co-borrower is, the difference between a co-borrower and a cosigner, and the pros and cons of having a co-borrower or a cosigner on your car loan and your loan refinance.
Key Points
• A co-borrower is a person who applies for a loan with the primary borrower and is equally responsible for repaying the debt.
• Adding a co-borrower with a strong credit history can increase the likelihood of loan approval and may secure better interest rates.
• Both the primary borrower and the co-borrower are legally obligated to repay the loan, making it a significant financial commitment for both parties.
• Late or missed payments can negatively affect both the primary borrower’s and the co-borrower’s credit scores.
• Choose a co-borrower carefully, as the financial and legal implications can strain relationships if there are payment issues.
What Is a Co-Borrower?
A co-borrower is someone who applies for an auto loan with you. As a co-borrower, the person is treated as an equal in the responsibilities, rights, and ownership of the car. A co-borrower’s credit score, debt-to-income-ratio (DTI), income, assets, and other financials are also looked at during the application process.
Co-borrowers are also on the loan documents, meaning they’re on the hook for making payments on the loan. For example, you and your spouse can apply for a car loan as co-borrowers, or you and your sibling live together and plan on sharing a car, so you apply for the loan as co-borrowers.
Recommended: Smarter Ways to Get a Car Loan
Can I Use a Co-Borrower to Refinance an Auto Loan?
Yes, the same advantages and considerations to using a co-borrower exist when you want to refinance as existed with obtaining the original loan.
If you want to refinance an auto loan, which is when you take out a new loan, perhaps for a more favorable interest rate or better terms, you can add a co-borrower. While the lower of the two credit scores will be used in a co-borrower arrangement, combining incomes can help you snag better terms on your loan. You may find the cost to refinance an automobile more favorable with a co-borrower.
Likewise, you can refinance to remove a co-borrower from a loan. If you’ve built your credit since you originally took out your auto loan, you may want to consider removing the co-borrower and handling the debt on your own.
Recommended: Pros and Cons of Car Refinancing
Does It Matter Who Is the Borrower and Co-Borrower?
Because a co-borrower is simply another borrower on the loan and both borrowers share equal responsibility in making payments, it usually doesn’t matter who is the borrower or the co-borrower.
It should be noted that on the loans with co-borrowers, sometimes a lender will note a primary borrower. This might be the person with the higher credit score, or perhaps the name appearing first in the application.
What Rights Does a Co-Borrower Have?
Essentially, a co-borrower has the same rights as the borrower when it comes to the vehicle. For example, should you want to list the car for sale or refinance the car, you can’t do so without getting your co-borrower’s permission. During the sale of a car, both borrowers usually need to be present to sign the car’s title to the new owner.
In the lender’s eyes, a co-borrower is equally responsible for making payments on the vehicle — regardless if you and the co-borrower worked out some sort of verbal arrangement. Also, both you and your co-borrower could take hits on your credit scores if payments on the loan weren’t made in time.
Can a Co-Borrower Take the Car?
A co-borrower can take the car, but not without your permission. For example, if the co-borrower wants to take the car, sell it, or trade it in, you will need to sign off on it before the co-borrower can proceed.
When it comes to signing the title to sell or trade in a car, there might be exceptions. Look closely at the fine print to see if both co-borrowers need to be present. The rules also vary by state, so both borrowers may need to be at the sale or trade no matter what the title says.
Co-Borrower vs. Cosigner
While commonly confused, a co-borrower and a cosigner are not the same thing. When someone is a co-borrower, his or her name is on the loan and the person is tasked with making payments along the way. While a co-borrower has the same financial responsibilities, rights, and ownership of the car, a cosigner does not.
There are certain cosigner requirements, the main one being the cosigner must become involved and make necessary payments if the borrower is unable to. Typically, a cosigner comes into the picture if a borrower can’t qualify for a car loan on their own. The reasons might include if there are blemishes on the borrower’s credit profile and their credit score is low, or if they don’t have much of a credit history.
It’s only when they’re not able to keep up with payments that the cosigner is compelled to make those payments. A cosigner can be a spouse, relative, or friend — anyone who wants to help the borrower qualify for a loan they probably wouldn’t qualify for on their own.
Recommended: Can a Cosigner Become the Primary Borrower?
Pros and Cons of Using a Co-Borrower Versus a Cosigner
Let’s look at the advantages and disadvantages of using a co-borrower versus a cosigner on a car loan:
Pros of using a co-borrower:
• May qualify for a larger loan amount
• Can share in the repayment of the loan
Cons of using a co-borrower:
• You’re not the sole owner of the car
• Typically need their sign-off before trading, selling, or refinancing the car
• Both your credit scores could take a hit if unable to stay on top of payments
Pros of using a cosigner:
• May qualify for a loan with better terms or larger amounts if you have less-than-stellar credit or are new to credit
• You’re the only owner of the car
Cons of using a cosigner:
• You are the one on the hook for making payments, unless you fall behind and the cosigner must take over
• If you don’t stay on top of payments, it could hurt not only your credit score but also your cosigner’s score
Is Having a Co-Borrower Best for You?
Having a co-borrower when you take out a loan or refinance your auto loan can be a solid choice if you’d like someone to help you with payments and if you don’t mind co-ownership. This typically works best if you live with someone — if they’re your spouse or a close relative. The help the co-borrower offers with credit and employment history in obtaining a car loan could make this a good choice.
The Takeaway
Adding a co-borrower can boost your loan approval odds and borrowing power by combining incomes and credit profiles, but it also means sharing full responsibility — and risk — for repayment from day one. Before inviting a co-borrower, make sure you both understand the terms, have a clear repayment plan, and communicate regularly.
A co-borrower can also be used to refinance an auto loan. If your co-borrower could potentially get you a better rate or better terms, it could be worth exploring.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Does it matter who is the borrower and co-borrower?
No. Sometimes the lender will note who is the borrower and co-borrower, and that can be tied to whose credit score played a lead role.
What rights does a co-borrower have?
A co-borrower usually has the same rights as the borrower, including joint ownership of a car. If one party wants to sell, trade in, or refinance the car, they would need to get the other co-borrower to sign.
What does it mean to be a co-borrower on a loan?
A co-borrower on a loan is someone whose name is on the loan documents as a borrower. They share responsibilities in paying off the loan and also benefit from the loan in that they own the asset.
Photo credit: iStock/Milko
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