If there ever was a book for the most awkward moment in a human’s life, a friend asking to “co-sign” a loan would make the front page.
Yes, your friends and relatives may ask you to co-sign a loan for them to boost their approval rate. But do you have to? Now, if you have a high credit score, then you might not have faced any such issues from personal loan providers. But some of your friends might need help.
If a borrower with a poor credit score can get someone with a good credit score to co-sign for them, they can beat the odds and get approval. Because there aren’t any easy loans to get approved for with a low credit score.
No doubt, it is a generous act on your part to co-sign your loved ones’ loans. But by doing so, you will be putting your credit history on the line! So before you decide to co-sign a fast credit loan for your loved one, there are a few things you must consider. Let’s explore it in detail.
What does it mean to be a co-signer?
A co-signer helps the borrower get a loan by signing their name on the application form. By doing so, they offer a guarantee to the personal loan provider that they will repay the loan in case the borrower is unable to. Once the form is signed, it becomes a legal obligation.
Since lenders don’t provide instant loans with no credit check, ineligible borrowers often resort to co-signers for improving their approval chances.
Things to know before co-signing a loan
1. You cannot use the borrowed loan amount
When you co-sign a fast credit loan, only the primary borrower will enjoy the benefit of the loan.
You won’t have the loan at your disposal or be able to use the loan. The only benefit you'll gain here is a probable boost to your credit score once the debt is paid off entirely. However, considering that your credit score is already high (because you qualify as a co-signer), it might not be worth the risk.
2. You are responsible for the repayment in case of default
Co-signing a fast credit loan is more than just offering your good credit profile to a friend. In case the primary applicant claims bankruptcy, the sole responsibility of repaying the debt falls on your shoulder and you might even be sued for the debt.
Because no matter what the situation, the personal loan provider will expect you to pay the loan in full.
3. It will impact your credit score
As a co-signer, you are just as responsible for the loan repayment as the primary borrower.
When you choose to co-sign a loan, both you and the primary borrower agree to the loan terms. This ongoing loan along with its repayment record gets reflected in the credit report of both parties, impacting their credit scores equally.
If the borrower is late on payments or misses an EMI, it will cause your credit score to fall. Not to mention, it can also affect your ability to apply for easy loans and to get approved for credit cards.
In such a case, you can also suggest the borrower to opt for a small cash loan where no credit check is needed.
4. Your debt level rises
When you choose to co-sign, the loan gets added to your dues. As a result, your debt-to-income ratio increases, which is the measure of your debt repayment in terms of your income. This may affect your chances of loan approval as many personal loan providers don’t favour a high DTI ratio.
Moreover, during the loan tenure, if your income decreases, your DTI ratio can increase further. Thus, affecting your ability to borrow instant loans with no credit check.
However, co-signing isn’t always a poor decision. If the primary borrower makes the EMI payments timely, it can positively impact your credit score. Here’s when becoming a co-signer can make sense.
- When you are sure of repayment
Before you co-sign a loan for a loved one, you must assess their financial position and repayment capacity. This way, you can make sure that they can pay the EMIs on time and you can co-sign the loan without the risk of default. Even if it’s just a small cash loan with no credit check.
- When you can take the risk
Fast credit loans may have a shorter tenure, so you may think there’s no harm in co-signing. But such loans come with significant risks.
You should only agree to co-sign for someone when you’ve understood the risks clearly and have the financial capacity to take on the debt should the need arise. Make sure to evaluate the pros and cons to ensure your finances aren’t affected in the long run.
However, if push comes to shove, you can consider taking an unsecured, instant loan with no credit check to repay the debt.
The bottom line
Before co-signing a loan, read the loan agreement carefully, assess your finances, and determine the risks involved. And if you don’t want to co-sign for someone else, tell them clearly and consider helping them in other ways. Whether it’s a small cash loan with no credit check or a secured one, a loan is still a huge financial commitment.
But if you want to co-sign and help a friend in need, trust Tata Capital! We offer affordable and competitive personal loan interest rates and structured EMI plans. Visit our website for more.
17 June 2022
5 mins read
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