Tuesday, June 28, 2011

Advantages of a Co-Borrower Vs. a Cosigner

There is a world of difference between being a co-borrower and a cosigner. Co-borrowers have a legal status as co-owner of whatever asset is being held as collateral for a loan. Cosigners have no legal ownership of the asset; however, they are legally bound to the credit agreement that is connected to the asset.

Rights of Ownership

    As a co-borrower, you are co-owner of the asset. The asset, whether it's a car, motorcycle or boat, will be registered in both your name and the other owner's name. It would require both signatures to sell the asset, and both are responsible for the payments and upkeep. A cosigner, however, has no rights of ownership, only the obligation to pay if the registered owner of the asset does not pay. Whereas co-borrowers are empowered with equal rights of ownership in an asset, cosigners are simply there to pick up the pieces financially if necessary.

Credit Report

    When you cosign any type of loan, the loan is reflected on your credit report as well as the primary borrower's credit report. Your financial life becomes tied to the person's you cosigned for. If the person for whom you cosigned does not make her payments on time, it will have a negative effect on your credit. Even if the primary borrower makes all her payments on time as agreed, being a cosigner could still affect your ability to get credit for other purchases. Lenders will factor the cosigned loan into calculations they make concerning your ability to repay other loans. The loan you cosigned may raise your debt-to-income ratio significantly, which can cause you to either be declined for more credit or force you to pay a higher interest rate for items you buy on credit. In that sense, if lenders treat a cosigned loan as if it is your loan, you might as well be a co-borrower.

Selling the Asset

    As a co-borrower, you are entitled to a portion of any profits from the sale of the asset. Even if you make no payments on the asset and your only role is to allow a co-borrower to use your credit to purchase the asset, you could demand a percentage of the profits when the asset is sold, because your permission is required to make the sale. A cosigner is in no position to demand or negotiate anything. The primary borrower does not need the cosigner's permission to sell the asset.

Repossession

    In a worst case scenario on a car loan, you may lose contact with the person who needed your help getting the loan. If you are a co-borrower and the other borrower stops making payments, you may rather have the car repossessed than make payments on a car you are not driving. If payments are not made on time and the finance company threatens to repossess the car, you, as a co-borrower, could authorize the repossession. If you know where the car is, you can take an active role in assisting the company repossess the car. Repossession will damage your credit rating, but it might be the best option in this case. A cosigner, on the other hand, has no ownership rights to the vehicle and would be guilty of a criminal offense for attempting to take possession of the car for any reason. The cosigner would remain responsible for the payments if the primary borrower fails to make them.

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