Personal loan eligibility: How does having a co-borrower affect your chances? | Mint

Although applying for a personal loan might seem like a pretty big financial decision, having a co-borrower with you could make the process go easier. Let’s see how adding a co-borrower to your application would increase the chances of it getting approved and even possibly make the loan conditions better.

Understanding personal loans

Personal loans are unsecured; hence you can get money to borrow without necessarily putting any deposit or collateral in place. Several things that one can use personal loans for include: debt consolidation, traveling, home improvements, and medical costs. Since personal loans do not have collateral, they tend to have higher interest rates as compared to secured loans.

What is a co-borrower?

A co-borrower, or co-applicant, is an applicant who applies for a loan with you but will share equal repayment responsibility. You can improve your overall credit profile and are more likely to be accepted for a loan by applying with a co-borrower.

Rahul Mehrotra, MD & CEO, RHDFCL, “Adding a co-borrower on the loan can be a key solution that can significantly improve loan qualification and lower the debt-to-income ratio. They can enable borrowers to qualify for higher loan amounts and secure more favourable interest rates, as the combined financial profiles become less risky. However, both co-borrowers share repayment responsibility, meaning that missed payments can negatively impact their credit scores. Therefore, careful consideration of both parties’ financial situations and responsibilities is crucial.”

Co-signers vs. co-borrower: What’s the difference?

A co-borrower is a person who shares equally the loan balance and repayment obligations with you. The application considers both your income and credit scores.

The co-signer intervenes only if you are unable to repay the debt as a guarantor. Repayment responsibilities are not actively shared by them.

How does a co-borrower impact your personal loan eligibility?

1. Increases your income: Your potential for earning is increased when you apply with a co-borrower because the lender considers both of your incomes. If your income is not enough to use, this can help you qualify based on income requirements or get a larger loan.

2. Improves credit rating: A co-borrower’s excellent credit profile offsets a less impressive one, but their credit score does not automatically lift yours. This makes you a more attractive candidate to lenders.

3. Boosts confidence in repayment: Lenders are assured that loan EMIs will be paid on schedule when the repayment burden is shared with a co-borrower. Furthermore, this will also cut down your financial burden on your monthly expense budget.

4. Lower debt-to-income ratio: Lenders perceive you as safer when your DTI ratio is low. Even though you already have debt, filing together enhances your overall picture and gives you a better chance of getting accepted.

5. Higher interest rates: Better loan terms, whereby the interest rates are lower, often result from a good joint financial profile comprising more income, better credit scores, and increased repayment capacity.

In conclusion, the more chances of approval and possibly better conditions, especially when you have a co-borrower. But selecting the right co-borrower is quite important. They should have an equal commitment to paying back their debts, good credit history, and are financially stable.

Remember that personal loans are not secured, hence carry high interest rates. Even though they can help you meet urgent financial needs, you should borrow responsibly and ensure you can pay back without exceeding your budget.

(Note: Raising a personal loan has its own risks)