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Things To Note Before Co Signing A Loan

IndianMoney.com Research Team | Posted On Tuesday, May 14,2019, 03:14 PM

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Things To Note Before Co Signing A Loan

 

 

What is Co-Signing a Loan?

If you co-sign a loan, then you are signing up to take responsibility of repaying the loan availed by the main applicant. Both co-applicant and main applicant are equally responsible when it comes to paying back the loan. Hence, you must be extremely careful while co-signing a loan. You shouldn’t co-sign a loan if you are not confident of the main applicant’s repayment capabilities.

When Does Someone Co-Sign a Loan?

Co-signing a loan is common these days. Co-signed loans are also referred to as joint loans. Joint loans are availed when the main applicant alone does not meet the income eligibility criteria. In this case, the main applicant must add a co-applicant in order to meet the income eligibility criteria. Today, many home loans in metro cities are availed with two or more applicants. If you are adding a co-applicant to increase income eligibility, then that co-applicant must necessarily have some source of income.

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Things To Note Before Co-Signing A Loan

Who Can Co-Sign a Loan for You?

You can request friends, family members or anyone who trusts your repayment ability. A person agrees to co-sign your loan application, only if he or she trusts you. Approach only those people who know you in person. Explain the reasons behind applying for the loan. Make them understand the importance of the loan.

Family members would know you well and they are the best people to co-sign your loan, but to do that, they themselves must have finances covered. An ideal co-signer is someone with a sizeable income who can absorb your loan with little or no fuss.

If you ask someone who has bad credit history to co-sign your loan, then you mustn’t be shocked if your loan application gets rejected. Co-signer must be someone with a sound credit track record of repayments and sizeable income.

Asking your spouse to co-sign is a good option. The next best option is your parents, but for that, they should not be older than 60 years. Your friends or close relatives are great options. Request only those who trust you and have good credit history.

You shouldn’t be in a state of shock if you happen to find nobody willing to co-sign your loan. Many find this risky, as they have to take up the responsibility of repaying the loan. No one in the world is ready to put their family’s future in jeopardy by co-signing a loan.

If you find a person willing to co-sign the loan, then you have to be extremely cautious and be responsible while repaying the loan. You mustn’t let down your co-signer at any cost. Do all that you can to keep up the faith that the co-signer shows in you. Try and clear the loan at the earliest, as both you and the co-signer can heave a sigh of relief.

SEE ALSO: CIBIL Score Report - How to Check Your Credit Score Online?

What Happens When a Co-Applicant is Added?

By adding a co-applicant, you increase chances of loans getting sanction as you meet income criteria. If you co-sign a loan, then remember that you and the main applicant are equally responsible for the repayment. It doesn’t matter if you are going to utilize the funds for your benefit, you would still be responsible for the repayment.

Financial Implications of Co-Signing a Loan

The main applicant’s chances of loan application getting approved increases as the overall income (main-application + co-applicant) would meet the income eligibility criteria. Following are the major financial implications of co-signing a loan:

  • You Would be Held Equally Responsible for the Loan Repayment: If the main applicant fails to repay or defaults on the loan repayment, then you would be held responsible for the repayment. The lender would have all the rights to recover the loan amount from you.
  • Your Credit Score is Impacted the Same Way as that of the Main Applicant’s: It doesn’t matter if you are repaying or the main applicant is, your credit score would be impacted the same way as that of the main applicant. If the main applicant is not making regular repayments, then your credit score would take a beating. If the main applicant is repaying regularly, then your credit score would be good.
  • Your Debt Increases: Though the joint loan may not benefit you, it does show up in your credit report. In the credit report, it doesn’t show if you are the main applicant or co-applicant. Hence when you are applying for a loan for your own benefit, lenders might reject the application as you already have debt in your name.

How to Come Out of a Co-Signed Loan?

If you have co-signed a loan and want to come out of it, then it’s not as easy as you think. Lenders would love to retain your name as they would have two accounts to attach when the main applicant defaults. Your name would be taken off from the loan only when the main applicant alone meets the requisite income criteria. Hence, you must be doubly sure when co-signing a loan.

SEE ALSO: How to Maintain a Good CIBIL Score?

Conclusion

A friend in need is a friend indeed! This holds good when your friends co-sign your loan application. Remember that both you and the main applicant are equally responsible for repaying the loan. Your credit score is impacted the same way as that of the main applicant. If you find it risky to co-sign a loan, then you must straightaway reject the request. Don’t co-sign a loan unless you are sure of the repayment capabilities of the main applicant. You shouldn’t put your family’s future on the line by co-signing a loan. Co-signing a loan is easy, but coming out of it is not.

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