Co-signing vs. co-owning a car: What’s the difference?
Quick insights
- Co-signers can be financially responsible for making auto loan payments.
- Co-owners may also contribute towards an auto loan, but also have a say in what happens to the car and need to be added to the car insurance policy.
- Making regular, on-time payments towards your auto loan and understanding your loan terms can help with maintaining or improving your credit score.
When it comes to buying a car, having someone to help you through the financial process, like a co-signer or co-owner, can be helpful. But how do you know which one makes the most sense for your situation? Let’s discuss more below.
What’s the difference between co-owning and co-signing a car?
To help you determine if you as a borrower need a co-owner vs. a co-signer for a car, let’s define what each of these terms mean:
- A co-signer of a car is someone who is also financially responsible for making payments towards an auto loan, as they are legally responsible if the primary borrower stops making payments.
- A co-owner may also be financially responsible; however, they have equal access to the car. Co-owners are added to insurance policies and are more involved in what happens to the car, such as during selling or transfers.
Typically, a co-signer is someone who co-signed an auto loan, like a parent, trusted family member or friend who acts as a financial “buffer” and can help improve your chances as a borrower of getting approved for an auto loan with more favorable terms. A co-signer will need to agree to being financially responsible for making payments if you cannot.
Co-owners have more of a say in what happens to the car. For example, if you, the borrower, decide to sell your car, you will need to work with the co-owner to agree to sell the vehicle. Additionally, even if a co-owner doesn’t drive the car, they will need to be added to the car insurance policy. Note that it is possible for a co-owner to also be a co-signer.
How to choose between co-owning and co-signing for a car
Co-owning a car may be beneficial for those who want equal access and rights to the vehicle, such as a couple. Co-signing, on the other hand, may be a better choice for borrowers who wouldn’t qualify for a loan or need assistance qualifying for better loan terms or for a larger loan amount. For example, if you are someone who has a low credit score or minimal credit history, a co-signer may help you get approved.
How does becoming a co-owner or co-signer affect your credit?
Co-owners and co-signers may be responsible for the payments towards the auto loan. In the event that you cannot make your payments, co-owners and co-signers may need to make those payments to avoid hurting their credit score or defaulting on the loan.
On the other hand, making on-time payments in a consistent manner can potentially improve your credit score. This is because credit mix, credit length and payment history are all contributing factors towards your credit score. When these loans are handled responsibly, it can reflect positively in your credit score.
Key considerations when deciding to co-own or co-sign a car
If you decide to become a co-owner or co-signer, make sure you set clear payment agreements and discuss the financial and personal circumstances at hand. Having foundational trust and conversations with the borrower can be helpful before signing the official paperwork.
Some other considerations to keep in mind as a borrower include:
- Set up automatic payments to help you avoid missing monthly installments, which could hurt your score.
- Schedule regular check-ins so that you and the co-signer or co-borrower are on the same page about payments and what happens to the car.
- Note that insurance premiums may increase when adding another person on to the insurance policy.
In conclusion
Co-signing or co-owning a car comes with important responsibilities. When managed responsibly, auto loans with a co-signer or co-owner can have a positive impact on your credit. Regular check-ins, timely payments and having a good understanding of the terms of the agreement are essential parts of a successful auto loan process.
