Thinking about co-signing a loan for someone or being a co-borrower on a loan with someone? There are several things to consider before undertaking either of these as each has different responsibilities attached to them and both can have adverse effects on a credit score if the loan is not handled correctly by the primary borrower.
What is a co-borrower? A co-borrower is someone who has joint responsibility on a mortgage, loan or line of credit with another person. Normally this would be a spouse or partner. In this situation both parties are equally responsible for the debt and both parties have equal access to the funds, or any asset attached to the loan.
Some of the pros of being a co-borrower would be:
- Having two incomes – debt loan and credit scores are considered and it may result in a higher loan limit and/or better interest rate.
- Both parties have equal access to the funds and assets.
The biggest con would be possible damage to the relationship of the two parties if one of the borrowers must take on more responsibility than the other due to extenuating circumstances.
What is a co-signer? A co-signer is typically a person who is trying to help another person get a loan due to their inability to qualify on their own. This is usually due to lack of income or a solid credit history. Even if they could qualify on their own, having a co-signer will usually improve their chances for a better interest rate.
The pros associated with being a co-signer mostly apply to the primary borrower and not the co-signer:
- The primary borrower will qualify more easily with a co-signer.
- The primary borrower will ultimately get a boost in their credit scores if payments are made on time.
- With a co-signer they may get a better interest rate.
There just aren’t a lot of “pros” to being a co-signer. The major factor against being a co-signer would be if the borrower defaults on the loan. In this case the co-signer is responsible for the repayment of the loan but has no access to the funds or asset. If the borrower does default or have late payments those will also appear on the co-signer’s credit report. And there is no way for the co-signer to remove themselves from the loan.
How is all this designated on a credit report? If the person is simply a co-borrower, the Equal Credit Opportunity Act (ECOA) code will show as “J” which indicates a joint report. It’s a little more complicated in a co-signer situation. It could show a few different ways:
- M – Maker- If a borrower shows an “M” under the ECOA code this indicates the borrower is responsible and has a co-signer that is not the borrower’s spouse and will assume responsibility for the debt if the borrower defaults.
- S -Signer- If a borrower has an “S” on any of their accounts this means they are the co-signer, but the other person on the loan is not a spouse. And they will assume responsibility if the primary borrower defaults.
- P – Participant- If a borrower has a “P” on an account it means the account is joint but the actual contractual liability cannot be determined.
The decision to be either a co-borrower or a co-signer should take careful consideration. If you are wanting to share ownership of the loan or asset, being a co-borrower would be the best option. If you are just wanting to help someone get a loan, then being a co-signer might be the best option. Just be very sure the person you are co-signing for is responsible and will make all the payments on time. Being a co-signer is where a lot of people get themselves in trouble credit wise because if the primary defaults, they are still responsible for the debt but have NO access to the funds or asset held by the loan.
It is most important to remember that in either case, co-borrower or co-signer a late payment or default will affect the credit of all parties involved and can have a devastating impact on a credit score.