If your friend or a family member is unable to fulfil a loan’s eligibility criteria and wants you to step in as a co-signer, should you?
By co-signing the loan, you can help them get their application approved, enable them to borrow a higher loan amount, and make them eligible for competitive interest rates. But did you know that by doing so, you’re also putting your credit history on the line? So, before you co-sign a personal loan, there are a few things you must consider.
If someone chooses to apply for a personal loan with a co-signer,both people agree to the loan terms. The ongoing loan and repayment records show up in the credit histories of both people, affecting their credit scores equally. So, if you have cosigned a loan for a friend and they fail to make timely repayments, it will harm your credit score. On the other hand, if the cosigned loan is repaid timely, your credit rating will go up naturally. It’s best to cosign for someone you trust completely.
Your debt-to-income ratio (DTI) is the ratio of your payments towards outstanding debts to your income. When lenders agree to provide a personal loan with a co-signer, they hold both applicants equally accountable. Thus, the loan’s EMI repayments also get added to your payments towards outstanding debts, increasing your DTI ratio. During the tenure, if your income decreases, your DTI ratio can increase further. This can negatively impact your ability to borrow credit.
However, if you’re financially sorted to meet the loan obligations in case the need arises or confident about the primary borrower’s repayment capacity, there is no harm in cosigning.
Additional Read: A Personal Loan from the Comfort of Your Home
Accountability for EMIs
By co-signing a loan, you promise to make repayments if your friend, the borrower, fails to do so. A missed or delayed payment will automatically reflect negatively in your credit report and bring down your credit score. To ensure the burden doesn’t fall into your lap, try to keep close communication with the primary borrower.
Or, even if you have to step up for the borrower, the loan payments shouldn’t strain your personal finances. Reviewing the borrower’s budget along with yours is a great way to prepare for any complications. After all, availing of a loan with a co-signeraffects both parties’ DTI and credit scores.
Additional Read: Things to Consider Before Taking a Second Personal Loan
A word of advice
Co-signing is not always a poor decision, but you must remember the risks. Before you co-sign, read the agreement carefully, evaluate the consequences, and assess your payment capacity. Check if the lender has the provision of releasing the co-signer from the loan agreement after a certain period.
If you do not want to co-sign someone’s loan, tell them clearly. You can lend money to help with the down payment instead.
If you are looking for a trusted lender, Tata Capital is here to help. We offer you competitive personal loan interest rates and flexible repayment options. Visit our website to learn more and apply today.