Taking a personal loan is often necessary to finance major expenses or consolidate high-interest debts. However, getting approval for a personal loan without strong credit or income history can be challenging. This is where co-signers in personal loans can make all the difference.
A cosigner is someone who agrees to be legally responsible for repaying the loan if the primary borrower defaults. Cosigners help borrowers qualify for personal loans and secure lower interest rates, who would not otherwise qualify for a loan.
In this comprehensive article, we will explore the role and impact cosigners have on the personal loan approval process.
How Cosigners Help with Loan Approval
Including co-signers in your personal loan application can improve your your chances of approval in several ways:
- Boost Credit Profile: It can boost your credit profile. How? Lending institutions review the credit scores and history of all applicants. An additional cosigner with excellent credit can raise the overall score.
- Increase Income: Most of the loan providers require debt-to-income ratios typically under 40%. Extra income from a cosigner helps satisfy this minimum requirement.
- Lower Default Risk: One of the major benefits of having a co-signer is that co-signer promises to repay, which practically eliminates the risk of default from the lending institution’s perspective.
- Meet Requirements: Some of the institutions have strict requirements regarding income, residency status, citizenship, or age. A cosigner may help overcome these limitations.
It is easy to see why adding a financially stable cosigner can change the decision from rejection to approval. The improved risk profile and terms also lead to lower interest rates.
Knowing About Cosigner Requirements
Not just anyone can serve as an effective loan cosigner. Lending institutions have specific standards that cosigners must meet for their presence on the application to make an impact. Typical co-signer requirements for loans include:
- Minimum Credit Scores: The minimum FICO score requirements for cosigners tend to fall between 620 and 680, usually, depending on the loan provider. The higher the better.
- Low Debt Burdens: Loan providers want cosigners to have minimum monthly debts relative to their income. Typically, less than 20% is preferred.
- Strong Income History: Stable earnings from consistent employment carries more importance than variable or low incomes. Annual salaries are viewed more favorably than hourly wages.
- Good Payment Histories: While a few late payments may be overlooked, multiple defaults in payments can still disqualify.
Cosigners are held to high regard. Before asking someone to cosign your loan, make sure they meet these requirements.
Impacts of Adding a Cosigner
The co-signer impacts on loan approval is quite positive. Let us explore some of the major benefits:
- Greater Loan Approval Odds: Even applicants with poor credit or high debt have their approval chances vastly improved by the right cosigner, often to over 90% with excellent cosigners.
- Higher Loan Amounts: With the backing of a cosigner to enhance repayment confidence, lending institutions frequently raise loan size maximums over what they would approve for an individual borrower.
- Lower Interest Rates: A cosigner not only helps gain loan approval but can lower the rate by 0.5% to over 2%. This discount saves substantial money over the full repayment period.
- Shorter Loan Terms: Better proposed terms often accompany cosigned loans. One example is shorter repayment terms, meaning lower total costs and less interest paid.
- Establish/Rebuild Credit: Successfully repaying a cosigned instalment loan is an effective way to either establish a new credit history or rebuild a damaged one.
When Does Having a Cosigner Make Sense?
If you have great credit and a high income on your own, there is little benefit to complicating things with a cosigned loan. However, certain situations clearly require bringing another applicant into the equation. We have discussed the situations that help you understand when to use a co-signer.
- Young Borrowers: Recent graduates rarely have enough credit history to get approved or fair terms without cosigner help.
- Low/Variable Income: Gross monthly income below ₹2,500 can be insufficient regardless of other qualifications.
- Poor/No Credit Scores: Bad credit causes most applications to be automatically declined.
- High Existing Debt - If monthly payments already consume over 40% of your typical income, options are limited.
- Self-Employment: Unpredictable self-employment income is riskier to financial institutions than typical traditional employee income.
- Large Loans: Even well-qualified borrowers may need joint applications for maximum approval on big loans above ₹40 lakh.
Finding a Suitable Cosigner
Not everyone makes an effective cosigner. Before approaching contacts, objectively assess if they likely meet financial institution criteria:
- Excellent Credit: A FICO score over 700 is a must. Preferably over 750. Review credit reports.
- Low Existing Debt: Look for low utilisation and modest monthly payments. Mortgages may be acceptable.
- Stable Income: Full-time positions and salaried income are what financial institutions hope to see.
Also, consider relationship dynamics carefully:
- Closeness: Only approach very close contacts like parents, spouses, siblings, or perhaps extremely close friends.
- Financially Knowledgeable: Ideally, the cosigner completely understands the decision and is making an informed choice rather than just trying to help you out.
- Relationship Dynamics: If money problems are already causing stress, sharing a legal debt might make things worse.
Co-signer Approval Process
Presuming you have identified an appropriate cosigner candidate and they have verbally agreed to submit a joint application, this is what will happen next. Here is an overview of the Co-signer approval process:
- Submit Joint Application: All applicants complete the loan application fully disclosing incomes, debts, assets, credit histories and employment information.
- Individual Review: The financial institution scrutinises both the primary borrower's and cosigners' qualifications against the loan requirements. Additional verification steps may occur.
- Joint Decision: Based on the strength of the combined applicant details compared to loan factors such as amount, terms, and risk, the financial institution decides on approval or denial.
- Finalise Loan: Once approved, the rate and terms are set and the loan documentation is signed by both borrowers acknowledging shared legal financial liability.
- Distribute Funds: Finally, once all signatures have been obtained, the loan proceeds are disbursed, and repayment schedules begin.
Having a strong cosigner candidate by your side eases uncertainty as applicants advance through these stages toward getting approved.
Final Thoughts
Adding co-signers in obtaining personal loans from reputed financial institutions like Shriram Finance can significantly increase your chances of getting a personal loan approved, especially if your credit or income alone falls short. However, it's a shared responsibility, so choose wisely, communicate clearly, and honour the commitment for the benefit of both parties.
FAQs
What is a co-signer, and why is it needed?
A co-signer is a person who consents to be responsible for repaying a personal loan together with the borrower. In most cases, a co-signer in India is someone from the family or a good friend. When the primary applicant struggles with finances and credit score, co-signers improve the applicant’s credibility and make it easier to get a loan.
How does a co-signer improve my chances of loan approval?
The presence of a co-signer who has stable earnings and a good score helps your loan application. For Indian lending institutions, this is a beneficial factor, especially if your credit score is not high. As a result, approval is likelier as the financial institution is sure that the loan will be returned.
What responsibilities does a co-signer have?
If the primary loan borrower does not repay in India, then the co-signer is required by law to settle the debt. Examples of such expenses are EMI, fines and outstanding charges. It also has an impact on their credit history. For this reason, co-signing should not be taken lightly, because it influences both the co-signer’s financial and credit status.
Can a co-signer withdraw after signing?
Usually, a co-signer’s name typically stays on the loan with the borrower either until it is closed or until a new contract goes through without their name. A co-signer is liable for the loan as long as the main borrower has not repaid the entire amount. Repayment cannot be stopped in the middle, except when the lending institution agrees to change the loan terms.
How does having a co-signer affect my interest rate?
If you have a creditworthy co-signer, Indian financial institutions might give you a loan with better loan conditions such as a reduced interest rate. Because your lending institution assumes less risk, you might enjoy some extra perks. Though, what you actually pay will still be affected by both of your credit histories.
What happens if I can't repay the loan?
If you fail to pay, your co-signer will be required to pay off what you still owe. When you get a loan in India, both your and the co-signer’s credit scores could change. Legal action may be taken against the co-signer as well. It may harm their ability to get more loans in the future and damage their financial reputation.
Who should consider being a co-signer?
If someone has a regular income, a good credit score and complete faith in the person applying for the loan, they can consider co-signing. Often, a parent, a sibling or a spouse is the usual choice in Indian families. It is also necessary for them to have the financial means to repay the loan.