Given the rising cost of living, you might seek financial help in the near future. This financial help can be in the form of a loan. A loan can be of different types - personal, auto, home or even a credit card. Banks and credit institutions have numerous criteria for sanctioning loans to individuals. You must have come across them often when applying for one. If your income is inadequate and you lack a credit history, your application for a loan is most likely to get rejected. To counter such a situation, you can always opt for a co-applicant. Such type of an application is also known as joint finance.
A co-applicant is an individual with whom you can apply for a loan in spite of being a primary borrower. This facilitates your eligibility as a potential borrower. Not only do banks consider your income, but also the co-applicants income when sanctioning the loan amount. Also, you need to insure that you have a valid credit history, your co-applicant cannot assist you in granting a loan from a bank in case you have a bad credit history.
The primary purpose of a co-applicant in a joint loan is to provide financial guarantee, it is his responsibility of repayment in case the primary borrower defaults. Even the borrowed amount is determined on the basis of your and the co-applicant’s combined income. If you fail to pay back the loan, then it is the responsibility of the co-applicant to pay back the loan. Therefore, it is important to understand the risks of being a co-applicant.
As mentioned before, both the parties are involved when applying for a joint personal loan. So are their CIBIL scores. In a personal loan, the bank generally checks the applicant with a lower CIBIL score for sanctioning the loan amount. When it comes to credit scores, a co-applicant cannot help you improve your credit score. Also, if you fail to pay back the loan on time, it is bound to have a negative impact on the co-applicant's credit score.
One part where the co-applicant can help you is with the help of their debt to income ratio (DTI). A co-applicant with a low DTI improves the chances of loan approval since their debts and income are figured along with yours. This can also be used as a criteria for availing a better rate of interest or the amount of credit limit.
Spouse - Your spouse is considered as the best co-applicant by any bank. Both you and your wife can apply for a joint loan account as both of the incomes are taken into considerations. The tenure of the loan is depended on the age of the older person and both, you and your wife can avail tax benefits for the same.
Family - This can be a combination with mother/father/brother or sister. Banks will only take blood relatives into consideration. Also, there are many banks who do not consider brother and sister as co-applicants for loan.
Lower rate of interest - If your co-applicant has a good CIBIL credit score, your loan application is more likely to get faster approval along with a lower rate of interest.
Improved eligibility - Your eligibility for loan approval is greatly increased with a co-applicant who has a good CIBIL score.
It is not a good option to bring a co-applicant on the loan application if their debt to income ratio is the same or lower than yours. This is because if one person qualifies for a loan with a good credit score, and they decide to add a co-applicant whose credit score is lower or have a higher debt to income ratio, it is possible that the partners will lose the applicant for a loan approval, even though the primary applicant was eligible.
Who is a co-applicant?
A co-applicant is an individual with whom you can apply for a loan. They can be your spouse, family, etc. You can use a co-applicant for a joint loan application.
Is it necessary to have a co-applicant?
No, it is not necessary to have a co-applicant. But in case you have a low credit score and you want to increase the chances of availing a personal loan, you can seek a co-applicant with a good credit score for the same.
What is debt to income ratio?
Debt to Income Ratio is the ratio which represents the amount of outstanding debt in comparison to the income of an individual. It is a good indicator of the financial health of an individual. The higher the debt to income ratio, the more likely it is that your loan application will get rejected.
What if I default on my joint loan payment?
In case you miss out on a loan payment due to some financial emergency, your co-applicant will be held completely responsible for repayment of the borrowed loan amount with interest and penalty charges. Hence, you should be aware of all the risks before becoming a co-applicant for a personal loan.
Which loan can I apply with a co-applicant?
You can apply for an auto loan, home loan, personal loan and even a credit card with the help of a co-applicant.
