People lend money for multiple purposes. Reasons range from purchasing a home, or a car, starting a business, funding one’s education, or even clearing existing debt.
Banks perform multiple checks, from checking your credit score, your income level, verifying your employer, to even checking how long your company has been founded, before approving loans.
Fair to say, that it’s a rigorous process. And more often than not, not all are eligible to get loans. A report from TransUnion CIBIL states that 22 crore people in India are eligible for a loan. That’s ~16% of the population.
The chances of securing a loan approval are higher when you apply with either a co-borrower or a co-signer. This is because according to banks, there’s a better guarantee of repayment.
But, there are ample differences between a co-borrower and a co-signer, and they are not the same. Let’s understand each of these:
Who is a Co-Borrower?
A co-borrower is also called a co-applicant or a joint applicant. Here you and the person borrowing both apply for the loan together. The loan documents will mention both of you as the borrowers, and you will both be liable to pay off the loan.
Let’s understand with an example:
You and your spouse want to buy a home together. Both of you apply to secure a joint home loan, where each of you will share the EMI burden in a defined ratio. You will both share an equal proportion of the asset, i.e., the home in this case.
Pros and Cons of a Co-Borrower
| Pros | Cons |
| Eligible for a higher loan amount | Default will affect both borrowers credit scores |
| Responsibility is shared for loans taken | If the relationship’s affected, it may end in lawsuits and legal battles for ownership of assets |
| Ownership is shared between the individual | Risk of individual payment in case one person doesn’t collaborate |
| Responsibility is shared for loan taken |
Also Read: A secret hack for students to build Credit Score from scratch
Co-Signer
A Co-Signer on the other hand, is someone who takes “responsibility” to repay the loan. But this is only in the case of any defaults by the primary loan borrower.
The reason why a co-signer is important is because it reduces the risk to the bank. After all, there is someone who’s guaranteeing to pay back the loan amount in case of a default.
Let’s understand with an example:
You are looking to avail an education loan for your Master’s. In this case, banks may reject your loan application, because currently you may not have any income. In this case, your parents can act as a co-signer.
This way in the worst-case scenario of you not being able to pay the loan back, your parents will be liable to pay it.
Pros and Cons of a Co-Signer
| Pros | Cons |
| Increases loan approval odds | On default, even the cosigner’s credit score will be affected |
| Both credit scores could be boosted with on-time payments | May damage relationships if the loan is not handled properly |
| Owner of the funds is the primary borrower | Increases debt to income ratio of co-signer |
