Co-Signer vs Co-Applicant Explained

The terms “co-signer” and “co-applicant” may sound like they’re the same, but there are actually some key differences between the two that are important to understand if you’re thinking about financing a loan alongside friends or family members.

What’s the Difference?

A co-applicant, also sometimes referred to as a co-borrower “is a full-fledged partner in the account or loan transaction,” Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said in an email. Each person has all the same rights and responsibilities pertaining to the loan and, when it comes to applying for the financing, both parties’ financials, including income, are generally used to calculate how much credit should be extended, he said.

Co-applicants are typically common when it comes time to buy a home.

“For mortgages, this divides the responsibility of repayment equally between the two property owners,” Bruce McClary, vice president of public relations and external affairs at the National Foundation for Credit Counseling, said in an email.

But, no matter what type of financing is involved, both parties are on the hook for any missteps.

“If defaulted, both parties are equally fully responsible even if it was only one of them who ran up the charges (we usually see this with credit card accounts when clients divorce),” Nitzsche said.

Co-signers, on the other hand, are generally added to an account in order to help someone with no credit or bad credit get financing.

“The healthy credit record of the co-signer can help the other person get past credit approval thresholds and qualify for more affordable rates,” McClary said. But, despite that role, a co-signer generally isn’t granted the same usage rights as the primary borrower. (For instance, a co-signer on a mortgage may not have property rights to the home.)

Still, “if the primary applicant fails to repay the account according to the terms of agreement, the lender can [pursue] the co-signer for the remaining balance,” McClary said.

It’s also possible to be a guarantor, someone who “guarantees” a loan for a friend or family member.

“A ‘guarantor’ … is similar to a co-signer except that the guarantor doesn’t become liable until the bank has exhausted all other means of collection from the primary borrower,” Nitzsche said. “With a cosigner, the bank can come after both parties right away for collection.”

Considering a Co?

Remember, in all these instances, you could ultimately be on the hook for payments and charges. Plus, any unpaid bills, defaults, collections accounts, or, if the debt is attached to a mortgage, short sale or foreclosure, will likely appear on your credit report and damage your credit score. That’s why you should always consider all your options very carefully before signing alongside someone on those dotted lines.

And, no matter what route you go, it’s important to keep an eye on your credit so you know how any co-signed or joint accounts may be affecting your credit. (You can view your credit score for free each month on Credit.com.)

If a co-signed or joint account has tanked your credit, you may be able to improve your score by disputing errors on your credit report, paying down high credit card balances and limiting new credit inquiries until your score rebounds.