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Co-signing and co-owning a car are two different ways to approach applying for a car loan with an additional borrower. In both cases, the secondary borrower needs to have sufficient credit and income to support the loan on their own. But each has benefits and drawbacks, depending on what both parties are looking for.

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Co-signing vs. co-owning a car

When you co-sign a car loan, you’re essentially promising to cover the monthly payments if the primary borrower can’t, yet you won’t hold any legal rights over the car. With co-ownership both the owner and the co-owner are named on the title, giving them equal rights and obligations towards the vehicle and the loan.

Co-signing for a car loan

Best for: Situations where an individual needs assistance in securing a loan, perhaps due to lack of a credit history or an insufficient credit score.

Co-signing for a car loan can aid the primary borrower in securing a car loan and potentially lower expenses with a better interest rate, provided the co-signer has a solid credit score. However, the co-signer risks being liable for payments if the primary borrower fails to pay and has no legal ownership over the car.

Co-owning for a car loan

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Best for: If both parties will use the vehicle and want to share the financial responsibilities.

One benefit of having two names on the car title is favorable loan terms if both parties have a good credit score. However, it also implies equal access to the car and potentially elevated insurance charges. Both individuals must agree to sell or transfer ownership.

How to choose between co-signing vs. co-owning a car

The main difference between co-borrowers and co-signers is the level of investment in the loan.

Co-borrowers have more responsibility and ownership than co-signers. Co-borrowing is best for people who both have good credit and want equal rights to the vehicle — such as a couple that wants to buy a car together.

On the other hand, a co-signer is best for a borrower who wouldn’t qualify for the loan at all, or needs help qualifying for a larger amount or lower interest rate.

How does co-borrower or a co-signer affect your credit score?

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Both co-signing and co-owning a car can have significant impacts on your credit score. For co-signers, if the primary borrower is diligent in making timely payments, it can boost the co-signer’s credit score. However, if the primary borrower defaults and the co-signer doesn’t step in to pay, the co-signer is held responsible, and their credit score may suffer.

Co-owners, on the other hand, are equally responsible for the loan from the start. If payments are made on time, both parties’ credit scores can improve. But if one party fails to pay, both parties’ credit scores will drop.

How to prepare to co-sign or co-own a car

To be a co-signer on a loan, you’ll need to have a stable income and meet the credit score requirement set by the lender. The same is required for being a co-owner, because the credit of both borrowers is being considered.

What kind of conversation and preparations should the parties have?

Before deciding to co-sign or share ownership of a car, have a frank discussion about your and the primary borrower’s financial stability. You should both discuss and understand the legal and financial implications of your commitment. Make plans in case the primary borrower can’t make payments.

Make sure you understand what you’re getting into by reviewing and keeping a copy of the loan details. To avoid being blindsided by missed payments, ensure you’ll receive regular updates on the loan status and regularly check your credit report.

The bottom line

There are many reasons why you may choose to co-sign or co-own a car with another person. In either case, it is important that both parties are on the same page about what the relationship entails and what is expected from both of you.

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Category: WHY