You may have heard the terms co-buyer, co-borrower, or joint applicant used alongside the term cosigner when describing auto financing. Even though these terms sound similar, they don’t mean the same thing.
Co-buyer vs. Cosigner
A cosigner is someone who agrees to sign for a loan in order to help a primary borrower get approved for financing when they're struggling with a lower credit score. Depending on the lender, having a cosigner may even be a requirement if the primary borrower’s credit is poor. A cosigner doesn’t share equal rights to the car or have their name listed on the title but is responsible for any payments in the event the primary borrower is unable to make them. It also affects a cosigner’s credit because they’re listed on the loan, so any negative or positive action affects both the primary borrower and the cosigner’s credit scores.
Co-buyers (also known as co-borrowers or joint applicants), on the other hand, have equal rights to the vehicle and are typically a spouse. Having a co-buyer with a better credit score can not only increase the odds of an approval, the incomes of the borrower and co-borrower can also be blended together to meet the income requirements of the lender. The primary borrower and co-buyer share rights to the car and the loan – with both responsible for making payments.
Bankruptcy with Co-buyers and Cosigners
In the event of bankruptcy that affects the car loan, what happens to the cosigner or co-buyer? For a co-buyer, if the primary borrower files bankruptcy, the co-buyer gets equal protection during the bankruptcy process – and vice versa – because they claim equal ownership of the vehicle.
It isn’t as simple if the borrower declares bankruptcy on an auto loan with a cosigner. If the primary borrower gives up the car in the event of a bankruptcy, the lender can go after the cosigner to pay any remaining debt following the sale of the vehicle. If the cosigner can’t pay the debt, an array of things can happen in addition to the delinquencies already listed on their credit reports, including collection action, a court order, and wage garnishment. The cosigner receives nearly the same hit to their credit score as the primary borrower – aside from the bankruptcy, which isn’t listed because the cosigner wasn't included in the filing.
Insuring the car is simple. A cosigner doesn’t need to be listed on the insurance policy. Insurance covers the vehicle, and since a cosigner has no ownership rights, listing them isn’t necessary. At the same time, although it varies by state, a co-buyer typically needs to be listed on the policy because they share ownership rights with the primary borrower. Since insurance companies base the cost of coverage on age (with younger drivers posing more of a risk), the cost of coverage is typically based on the younger of the two borrowers.
The Bottom Line
Don’t get a cosigner and a co-buyer or co-borrower confused. Both may help improve approval odds and possibly get the primary borrower a better rate, but the two have different rights to the vehicle being financed.
If you have a cosigner or co-buyer and are ready to start the auto loan process, The Car Connection can help get you started. With our car loan request form and our coast-to-coast network of dealers, we want to connect you to a local dealership that can help you get the financing you need with their subprime lenders.