How should I consider the financial impacts of a co-signed loan?

Co-signing a personal loan is a significant financial commitment in India. When you agree to be a co-signer, you share equal responsibility with the primary borrower for repaying the loan. If the borrower misses an EMI or defaults, the lender can legally demand repayment from you immediately. This means your own finances and credit score are on the line, even if you never see the loan money.

The loan will show on your credit report as an outstanding obligation. Any late payments or defaults by the primary borrower will negatively impact your credit score making it more difficult for you to qualify for loans or credit cards in the future. Lenders also factor in your co-signed loan when assessing your debt-to-income ratio, which can reduce your eligibility for new credit, even if you are not making the payments yourself.

You do not receive any ownership rights or direct benefit from the loan, but you take on all the risk. Legal action can be taken against you if the borrower fails to repay, and your assets could be at risk if the lender pursues recovery.

Before agreeing to co-sign consider these steps:

• Assess the borrower’s financial stability and repayment habits.
• Have a clear written agreement about repayment responsibilities.
• Monitor the loan account regularly and set up alerts for missed payments.
• Be prepared to make payments if the borrower defaults.

Co-signing should only be done for someone you trust completely, and only if you are financially able to take on the risk. Always weigh the potential impact on your own financial future before agreeing to co-sign a loan.