A co-borrower is a person who is jointly liable for a loan. This term is sometimes used interchangeably with terms like cosigner and guarantor, but these concepts are actually slightly different under the law. Co-borrowers share full liability for repayment and also have an interest in the property that secures the loan, while cosigners and guarantors only incur liability for the loan in the event that the original borrower defaults and the lender initiates collection proceedings.
A common situation where a co-borrower may be used is a home loan. If a couple buy a house together, both partners can be listed as co-borrowers on the loan. They are jointly liable for the repayment of the loan every month and for any other obligations associated with the debt. Both partners also have an equal share in the home itself. This setup for a loan can also be used for car loans and other types of loans.
When a lender agrees to accept a loan application from co-borrowers, it will expect detailed financial information from both applicants, or all applicants, if there are more than two borrowers. This includes credit history, documentation of income, and any other information that might be relevant to credit eligibility. The bank will evaluate this information to determine how much money it will offer, and what kind of interest rate it can provide.
The advantage of having a co-borrower is that people can qualify for loans that they would not be able to get independently. Co-borrowers can take out more money together because both of their incomes and financial situations are being considered and they may also be able to access a lower interest rate. The disadvantage is that if one person listed on the loan fails to meet obligations, the co-borrower will need to step in, and if the loan is too large for one person to handle, it may enter default.
By contrast with a co-borrower, a cosigner or guarantor agrees to pay a loan if the original borrower defaults. This person is not liable for the loan while it is in repayment and has no interest in the real estate, vehicle, or other property associated with the loan. Having a cosigner doesn't provide access to a bigger loan or a better interest rate, because the cosigner is acting as security, not entering into the loan with the borrower. People with limited or poor credit histories may pursue this option when taking out loans on their own so that lenders will agree to work with them; a common example is a student taking out student loans for the first time.