Co-borrower
A co-borrower is a participant in a loan agreement who shares financial responsibilities for repayment of the debt with the primary borrower. As a rule, a co-borrower is involved in applying for a large loan, for example, a mortgage, a car loan, etc. Having a co-borrower gives you a greater chance of qualifying for a loan.
The Difference Between Taking a Loan with a Co-borrower and a Co-signer
There is a crucial detail that affects the borrower’s decisions regarding the choice of a co-borrower or a co-signer:
- A co-borrower has the same rights and responsibilities regarding the loan as the primary borrower. For example, if they buy a house with a mortgage, both borrowers will have ownership.
- A co-signer does not have rights to the loan the borrower receives. They only undertake to repay the debt to the lender if the borrower experiences financial hardship.
About the Financial Responsibility of the Co-borrower
If you are offered to become a co-borrower for someone, carefully weigh the pros and cons. All payments on the debt must be repaid in accordance with the approved schedule. If there are delays in payments, this will negatively affect the credit rating of the primary borrower and the co-borrower.
Taking out a Loan with Several Co-borrowers
The number of co-borrowers may vary depending on how large a loan you need. For example, if a family with adult children wants to buy a house with a mortgage, everyone can act as co-borrowers. Bank practice shows that it is usually ineffective to take more than four or five co-borrowers. However, there are no legal restrictions on this issue.
Important Nuances for Obtaining a Loan with the Help of a Co-borrower
- Aco-borrower must be a client of the same bank where the primary borrower applies for a loan.
- The co-borrower’s credit rating, income, and other factors affect the terms and interest rates of the loan. Therefore, if your co-borrower has a better credit history than you, the loan will be cheaper. If the opposite is true, the loan terms will be formed in relation to the primary borrower’s data. Lenders take into account a better credit history when forming a loan offer.
- Each co-borrower fills out an application form to receive a loan and provides a full set of documents. After that, they sign an agreement with the bank and receive notifications from it about the status of the debt until it is fully repaid.
Risks of Taking a Loan with a Co-borrower
A co-borrower is usually involved in obtaining large loans. Therefore, it is important to maintain good relations with them throughout the entire loan repayment period. However, divorces and quarrels can easily break up good relations between partners or friends. In such cases, joint repayment of the debt becomes complicated. Therefore, you must be prepared to repay the debt yourself.