Co-Borrowing Versus Co-Signing Auto Loans: What You, the Borrower, Should Know Before Financing a Car

Co-borrowing and co-signing are two different type of loans considered by lenders. Most individuals, which once included myself into this majority, do not understand the differences. Before you sign either loan agreements, you should know what you and your co-signer/co-borrower are getting into.

Most of the time, co-borrowing and co-signing come into play when a person does not have enough credit to borrow. Typically, college, high school, and/or newly married couples are the demographics that cannot get credit, because of the little credit history they have. What I find odd is that most lenders are willing to negotiate with bad credit individuals over those with no credit; therefore, it is extremely difficult to get auto loans with no credit.

When talking to the experts at CarFinance.com, I found out some interesting facts about co-borrowing versus co-signing. These are facts derived from employees that have worked more than twenty years in the industry. Some good insider tips, if you don't mind me saying:

1. Who is signing up for co-signing and co-borrowing auto loans? Co-signing and co-borrowing generally occur between a parent and child; although, life partners are drawing a larger poll in applying for co-borrowing loans. Regardless of relationship, anybody is able to co-sign or co-borrow with a person, but that definitely does not mean you should.

2. What are the major differences between co-borrowing and co-signing? Co-borrowing and co-signing are not that much different at all. The only difference is that with co-borrowing, the co-borrower is listed under the title of the car at the DMV.

• Why is this helpful? In actuality, it is not. Some co-borrowers that are getting nagged by credit collection agencies think that if they remove their name from the title at the DMV (which is possible), then the calls will stop. Not the case, since both of you promised to pay back the lender. Paying the lender and owning the title are two separate areas to lenders.

3. When should you co-borrow or co-sign with someone? Hopefully, never. In these times, it is hard to be able to pay back debt especially with unemployment on the rise. Getting into a loan with another individual is risky. The best way to think about it is, can you afford to pay your debt as well as the other person's car loan if need be? If you answer yes, then it may not be too risky for you.

4. What are the penalties? There is no difference between co-borrowing and co-signing when it comes to penalties. If the person defaults on the loan (does not pay it), then the co-signer or co-borrower inherits the penalties as well-- this can include many annoying collection calls demanding payment and a large hit on both credit scores, especially if the vehicle is repossessed.

• Many times, parents sign into a loan with their teenager, but once he or she goes off to college, hand the payment responsibility over. Then when the lender calls to notify the co-signer/co-borrower that the teenager has defaulted on the loan, the parent has had no idea and redirects the lender to the teenager. The best way to handle this situation is to prevent it-- consistently ask your teen how they are handling his or her finances. Stepping in before the issue arises is best for the both of you.

When it comes to co-signing and co-borrowing, think before you act.

1. Is this person responsible? Hopefully, if you do decide to go into a loan with someone, you have known them long enough to answer this question accurately. Look at this person's past behavior, flakiness, shopping patterns, etc. You need to accurately access if this will be an issue later down the road.

2. Is this person negotiable? If this person defaults on the loan, will he or she be willing to work with the lender or shut down. Many individuals wait until they are contacted, better yet, to make the call in the first place to let the lender know of the current situation.

• One suggestion is to negotiate with the individual and make a set list of the "what ifs." For example, "what if I miss one month of payment"- "I will call the lender immediately and let you know," "what if I can't pay"- "the first time, I will sell my signed basketball jersey." etc. Having it all planned out and signed by both parties may help you feel assured enough to sign into a co-borrowing/co-signing loan.

Co-signing and co-borrowing can be tricky, and there may be better options out there for an individual to take to build up your credit, such as opening a credit card, paying your utilities, etc.

Always think before you sign that goes for everybody.