Co-signing is a concept followed by may while availing of a loan. Through co-signing, borrowers increase their loan eligibility and seek better terms. Suppose you want to apply for an instant personal loan but do not meet the eligibility criteria; you may ask a close friend or relative to sign the loan application with you. You may get the best personal loan rates if the co-signer’s eligibility is higher than yours.
However, if you are a co-signer, it is wise to consider the pros and cons of co-signing a loan application. The following sections discuss the top things you must consider before co-signing an instant personal loan application.
The Borrower’s Creditworthiness
Generally, a borrower needs a co-signer because they cannot fulfil the instant personal loan eligibility criteria. It means that the primary borrower is not creditworthy, according to the lender. Lenders usually check a borrower’s credit score to determine their loan eligibility. If the borrower’s credit score is below 700, the lender may be reluctant to approve the loan; hence, the need for a co-signer.
Having a co-signer is beneficial as it increases the primary borrower’s eligibility to get better personal loan rates. However, enhanced eligibility does not necessarily guarantee loan repayment. Remember, as a co-signer, you are the secondary applicant, not the primary one. So, the onus of loan repayments remains with the primary borrower. However, if they stop repaying at any time during the loan term, you will be equally or more responsible for repaying the loan.
Getting Stuck With Debt
According to a survey, nearly 30% of all co-signers get stuck with debt when primary borrowers default. Another survey indicates that nearly 40% of co-signers end up paying a significant part (or the whole) of the outstanding amount since the primary borrowers stopped paying. Know that as a co-signer, you have to repay the loan if the primary borrower defaults on the repayments.
Moreover, if the primary borrower dies, the lender will expect you to repay the outstanding amount. Additionally, if you possess assets while the primary borrower doesn’t, your lender might sue you first in the event of a loan default.
While it is difficult to refuse a close relative or friend, you must carefully evaluate the risks before co-signing an instant personal loan application form. It is wise to scan the primary borrower’s repayment capability before deciding.
The Effect of Co-signing on Credit Score
Co-signing an instant personal loan application does not benefit you except for the credit score. It is because the loan amount is credited to the primary borrower. However, timely repayments may boost the credit scores of both applicants. In contrast, if the primary borrower stops repaying the loan, your credit score will also fall since you are a party to the loan.
Hence, before co-signing a loan application, you must thoroughly check the financial condition of the primary borrower and sign only when you are sure of repayment.
The Impact of Co-signing on DTI
DTI, or Debt-to-Income, refers to the ratio lenders use to gauge a borrower’s income minus outstanding debt. When you co-sign an instant personal loan, the outstanding debt gets added to your and the primary borrower’s credit profiles. Hence, your DTI increases even when you are not the primary borrower. Moreover, if your income decreases during the loan term, the DTI will increase further, making it challenging for you to avail of credit.
Hence, before co-signing a loan application, you must evaluate its impact on your DTI to make a sensible decision.
Now that you know the factors to consider before co-signing an instant personal loan, scan the following checklist before deciding.
The Co-signing Checklist
Ask yourself the following questions before putting your signature on an instant personal loan application as a co-applicant:
- Can you repay the loan if the primary borrower defaults?
- Have you compared personal loan rates before choosing your lender? Are you sure that the primary borrower is getting the lowest rate?
- Do you know your credit score may decrease if the primary borrower stops repaying the loan?
- Have you contacted your lender to determine your liabilities if the loan becomes an NPA (Non-Performing Asset)?
- Have you asked your lender to inform you if the primary borrower defaults on a month’s EMI?
- Have you preserved copies of the instant personal loan application form and all documents?
Co-signing a loan application provides several benefits. For instance, it increases the borrower’s eligibility, and they can save on personal loan rates. However, your liability increases if you co-sign an instant personal loan. You may have to take on the responsibility of repaying the loan if the primary borrower defaults. Moreover, your credit score may take a hit if the borrower misses monthly payments. So, it is wise to analyse the effect of co-signing on your credit score and DTI ratio before deciding.