Personal loans have gained massive popularity over the last few years due to their easy availability, no collateral requirement, and instant approval. Whether you need immediate funds for an emergency, home improvement, holiday, or wedding, their competitive pricing, online processing, and minimal documentation requirements make them the first choice for salaried or self-employed borrowers.
The need for credit may arise at any point in life without giving you the time to save or plan. You won’t be eligible for a personal loan if you have a bad credit score or lower income than the lender’s minimum requirement. This is when a co-applicant can come to your rescue. Let’s see how a personal loan with co-applicant works.
Who is a Personal Loan Co-Applicant?
A co-applicant is an individual who co-signs the loan application with you and shares the responsibility of repaying the borrowed amount. It is common among borrowers to co-apply for a personal loan with a spouse, parent, or sibling. Both the co-applicants are equally responsible for the loan repayment as the primary loan applicant. Lenders consider both applicants’ incomes, credit scores, and other eligibility conditions before approving their loan application. If the applicant default, it will affect the credit scores of both the applicants and the lender may take the necessary action against both of them.
Benefits of Personal Loan Apply with a Co-Applicant
As mentioned earlier, applying for a loan with a co-applicant can improve your eligibility in case of low income or bad credit score. But how does it help?
In the case of a personal loan co-application, both the applicants’ credit scores and incomes are considered for a single loan. Therefore, you become eligible for a more considerable loan amount according to your requirements. If the co-applicant has a high credit score, it improves your chances of getting the best personal loan interest rate. Besides this, the burden of repaying the loan rests with both the co-applicants. Since the loan EMIs are effectively split, the entire loan amount doe not become a burden for one person only.
When Does it Make Sense to Apply for a Co-Applicant?
Here are a few times when applying for a personal loan with a co-applicant makes excellent sense:
- You Have Low Credit Score: If you have a credit score of less than 700, it is insufficient to get loan approval. A low credit score projects you as a risky borrower who may default on the loan at any time. Co-applying with a person with a high credit score can improve your chances of getting loan approval.
- You Have Lower Income Than Required: Lenders require you to have a minimum income every month to ensure regular EMI payment. If your income is lower than the lender’s minimum requirement, you may co-apply with a person with a higher income to improve your chances.
- You Have a High DTI Ratio: Lenders may reject your loan application or charge a high personal loan interest rate if your DTI ratio is higher than 30-40%. So, if you have too many financial obligations to attend, apply for a loan with a co-applicant with a low DTI ratio.
- You are Under-Age or Over-Age: Young adults who have just started earning may not have built up credit to secure a personal loan. People who have reached their retirement age may also have difficulty grabbing a loan approval. Therefore, it makes sense to co-apply for a loan with a person in their prime earning years.
- You Want to Share the Responsibility of Loan Repayment: You may consider co-applying for a loan if you want to share the loan EMIs with another person. When you miss the EMIs, the credit score of both the co-applicants will be affected, and the lender may take action against both of you.
Choosing a Co-Applicant
Are you looking for a co-applicant for a personal loan? Here are a few qualities to keep in mind.
- Sufficient Income: Most NBFCs have minimum requirements pertaining to the borrower’s monthly income. If you are applying for a personal loan with a co-applicant, look for a person who has a higher income than the lender’s minimum requirement.
- Good Credit Score: A co-applicant with a good credit score of 700 and above will more easily meet the lender’s minimum requirement. The higher their score is, the lowest your personal loan interest rate would be.
- Low DTI Ratio: DTI ratio or debt-to-income ratio is the percentage of your monthly income you spend towards other financial obligations. A high DTI ratio means higher chances of loan default due to less disposable income. Therefore, look for a co-applicant with a DTI ratio of less than 30-40%.
Irrespective of whether you apply for a loan alone or with a co-applicant, make sure you pay your EMIs on time. This will help you maintain and improve your credit score and improve your eligibility for future loan needs.