Co-signing a loan for a loved one can help them get easy approval and maybe even lower interest rates on their online personal loan. However, before you consider going the extra mile, it is essential that you review your financial wellbeing. Understanding all there is to co-signing can help you make the right decision. Follow these 4 steps to decide whether co-signing is the right move for you.
Look at why you may need to co-sign the loan
While there are various shortcomings the applicant may like to overcome with your signature, the general reason why your help is required is to assure the lender of repayment. This means the lender doesn’t view the applicant as creditworthy enough to grant a high sum at a low interest rate or approve the personal loan application as a whole.
While one of the reasons could be the absence of a credit record for the applicant, it can also mean they have defaulted on loans before or pose a risk of defaulting. To be careful, it is essential you narrow down on the reason they require your signature to make a better call on whether you should co-sign the personal loan application or not.
Understand how co-signing loan can affect your credit score
While you may not see the harm in helping a family member or friend, it is important to consider your own credit score too. This is because co-signing a loan makes you equally responsible for its repayment. In other words, any defaults, even late personal loan EMI payments, are bound to reduce your credit score.
This may then affect your chances of availing credit on favourable terms in the future. Further, this credit amount is also added to your existing debt on your credit report even though you aren’t the applicant availing the loan. This, in turn, affects your debt-to-income ratio. Alternatively, if the loan is repaid without any missed payments, your credit score could benefit from the shown financial responsibility too.
Take negative outcomes of co-signing loan into consideration
Are you wondering what could possibly go wrong? In case of a default, you are completely liable to pay the remaining dues to the lender. This is a huge responsibility and while you may trust the applicant to repay the loan amount, it is important you consider whether your finances are strong enough to carry this extra obligation without strain. While you may not like the idea of repaying someone else’s dues, it may be the only way to save your credit score in case of a default.
Follow preventive measures while co-signing a loan
Ask the applicant whether they are sure they will be able to manage repayment effortlessly and don’t just take their word for it despite your desire to do so. As someone who shares equal responsibility of repayment, you have the right to request a view of their repayment strategy and their income sources to ensure you aren’t exposing your credit reputation to irreversible threats.
Request copies of bank statements or ask for credentials that you can use to log into the loan account in order to track the repayment status time and again. This will spot trouble before it spirals into a huge debt. Further, ensure that you are putting your creditworthiness on the line for someone you can really trust to be financially responsible. Lastly, remember that though successful repayment can take your credit score up a notch, you can also achieve this yourself.
In case you are looking for a loan that offers substantial funding at nominal personal loan interest rate, be sure to consider the Bajaj Finserv Personal Loan that gives you up to Rs.25 lakh. You can also enjoy simple eligibility, online application and easy account management on this loan. Further, the Flexi facility allows you to borrow as you need from your sanction while paying interest only on the amount you use. You can also opt for interest-only EMIs to manage your cash flow better and repay the principal portion at the end of the tenor. To make things even easier, this reputed NBFC offers you a chance to check your pre-approved offer and view customised loan offerings and gain from personal loan instant approval.