Cosigning Vs. Co-owning: Which Is Best?

Cosigning and co-owning a car are two ways to approach applying for a car loan with an additional borrower. In both cases, the second borrower needs to have sufficient credit and income to support the loan on their own.

The primary benefit of co-borrowing with a joint loan is that both parties share equal access to the vehicle. Cosigning is not offered by many lenders, and for the cosigner, it presents a lot of risk with little reward. Consider the benefits and drawbacks of each option for your situation to determine which will better suit your finances and lifestyle.

What is a cosigner?

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

A cosigner is someone who has a positive credit history and is willing to take on payments if the original borrower fails to repay. Acting as a cosigner can help another person get a car loan that they may otherwise be unable to qualify for, either due to poor credit or no credit history. Usually, a family member or trusted friend is a good person to serve as a cosigner.

The cosigner has no legal ownership of the car, but they are responsible for payments if the primary borrower fails to pay. This could negatively impact the credit score of the cosigner — and damage your relationship.

Cosigning for a car loan can aid the primary borrower in securing a car loan and potentially lower expenses with a better interest rate than a bad credit auto loan, provided the cosigner has a solid credit score. Often, you can remove a cosigner once you have made a certain number of on-time payments.

Benefits of cosigning a car loan

• Helps with qualifying: A cosigner can help a primary borrower qualify for a car loan they otherwise wouldn’t be qualified for.
• Builds credit: If the primary borrower can stay on top of payments, the credit of both the primary borrower and the cosigner can be positively affected.
• Reduces costs: If the cosigner has a very good to excellent credit score, the primary borrower can qualify for a lower interest rate and fees.

Risks of cosigning a car loan

• Responsibility for payments: If the borrower defaults, the cosigner is responsible for all loan repayments.
• No legal claim: The cosigner is not on the title and has no legal claim to the car.
• Possible credit score damage: A single missed payment can also harm the cosigner’s credit score, even without default.

What is a co-owner?

Best for situations where both parties plan to use the vehicle and want to share the financial responsibility of an auto loan.

When you co-own a car, both owners are listed on the vehicle title. If you plan to purchase a car with a co-owner, establish ahead of time the schedule for who will use the car when, especially if your co-owner is not a spouse. You should also discuss how payments will be split and who will take primary responsibility for making the payments each month.

One benefit of having two names on the car title is more favorable loan terms if both parties have a good credit score. However, a joint loan also gives equal access to the car and potentially elevated insurance charges. Both individuals must agree to sell or transfer ownership. In general, you should only agree to co-own a car with someone who you trust — and who has the maturity to handle splitting financial responsibility.

Benefits of co-owning a car loan

• Safety for the co-owner: The co-borrower has the legal protection of having their name on the title.
• Better terms: If both borrowers have strong credit, the primary borrower may be extended better terms than if they applied alone.
• Both parties can contribute: It might make more sense to split the down payment 50-50 or share in car payments. when both borrowers own the car.

Risks of co-owning a car

• Equal rights: The co-borrower has equal rights to the car as the primary borrower. This means the co-owner must be involved in the sale or transfer of the car.
• Higher insurance costs: Even if the co-owner doesn’t use the car, they will likely need to be on the insurance policy. This can mean higher costs for both parties.
• Ownership disputes: If the relationship ends, it may take a court to decide who gets the vehicle when both people have ownership.

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

Choosing whether you want to co-own a car or need a cosigner depends on your circumstances and financial history. If you don’t have a good credit history, you may need help to get a car loan — a cosigner. If you plan on sharing a vehicle, being co-owners may be a better choice. Either way, at least one person (preferably both) will need to have a stable income and meet the credit score requirement set by the lender.

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

Before deciding to cosign 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 receive regular updates on the loan status and check your credit report consistently. And if you decide to part ways with your co-borrower or cosigner, you can remove them from the title by refinancing your car loan.

Bottom line

Cosigning and co-owning can come with a number of benefits, such as the possibility of better loan terms, certain legal protections and improved credit. However, cosigners do not have their name on the title, while co-owners do. 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.