Co-signature Vs. Co-ownership: which is better?

Co-signing and co-ownership of a car are two different ways to approach the car loan application with an additional borrower. In either case, the secondary borrower must have sufficient credit and income to fund the loan themselves. But each has pros and cons, depending on what both parties are looking for.

The differences between a co-signer and a co-owner of a car

A co-signer is someone who is also responsible for repaying the loan, but has no ownership rights to the vehicle. A co-owner has an equal right to it.

Co-sign a car loan

In the case of a car, the co-signer agrees to cover the monthly repayments if the borrower cannot make them. This is an important decision to make and will affect the credit of the co-signer.

Advantages of co-signing a car loan

  • Qualifying Assistance: A co-signer can help a primary borrower qualify for an auto loan that they wouldn’t otherwise qualify for.
  • Build credit: If the primary borrower can stay on top of payments, the credit of both the primary borrower and the co-signer can be positively affected.
  • Reduce costs: If the co-signer has a very good to excellent credit rating, the primary borrower can benefit from a lower interest rate and fees.

The risks of co-signing on a car loan

  • Responsibility for payments: If the borrower defaults, the co-signer is responsible for all loan repayments.
  • No Legal Claims: The co-signer is not on the title and has no legal claims on the car.

Co-ownership of a car

In the case of a car, both the owner and co-owner are listed on the title. Having a co-owner does not change the fact that the primary borrower owns the property. Depending on the title of the car, the primary borrower may need clearance before they can sell the car.

Benefits of car ownership

  • Security for the co-owner: The co-borrower has the security of having his name on the title.
  • Better terms: If both borrowers have strong credit, the primary borrower may qualify for better terms than applying alone.

Risks associated with joint ownership of a car

  • Equal rights: the co-borrower has the same rights to the car as the main borrower. This means that the co-owner must be involved in the sale or transfer of the car.
  • Insurance: Even if the co-owner does not use the car, he will probably need to be on the insurance policy. This can mean higher costs for both parties involved.

How to choose between co-signer and co-owner of 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 who want to buy a car together.

On the other hand, a co-signer is best for a borrower who would not qualify for the loan at all or who needs help qualifying for a higher amount or lower interest rate.

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

To co-sign on a loan, you must have a stable income and meet the credit score requirements set by the lender. The same goes for being a co-owner, as the credit of both borrowers is taken into account.

Even if you meet the requirements, an open conversation should take place between both parties. Co-signing and co-ownership both involve significant credit risk. Make sure a plan is in place in case the primary borrower cannot pay.

The bottom line

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

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