Getting a personal loan might appear easy. You just need to apply for one. But it isn’t that simple. More importantly, you need to qualify for the loan. Depending on that, the bank or the lending institution will either approve or reject your loan.
As an applicant, when you don’t meet a bank’s requirements, you can improve your chances of securing a loan by adding a co-applicant. A co-applicant, or co-borrower, is a person who applies along with the primary borrower for the loan and is equally responsible for repayment of the loan.
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Who Can Be a Co-Applicant
Co-applicants are usually immediate family members such as spouses, parents and siblings. Different lenders have different policies, but the fundamental requirement is the same. The co-applicant should be financially strong.
Benefit of Having a Co-Applicant
Here are the benefits of having a co-applicant
Boosts Creditworthiness: Where a borrower has a low credit score, he/she can increase his/her chances of securing a loan by including a co-applicant with a strong score, ideally 750 or higher. A positive credit history indicates a reliable payment behaviour and makes the application stand out in the lender’s eyes.
Lowers the DTI Ratio: Banks typically consider borrowers with a DTI ratio of 35 per cent or below as favourable. When the debt obligation of a borrower accounts for too large a portion of their income, a co-applicant with little (or none) helps tilts the balance in the borrower’s favour. So, when submitting a joint application, the bank looks at the entire financial profile. Thus, banks find it reassuring to issue a loan which has a co-applicant with a healthy DTI.
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Increases Loan Eligibility: An income or asset shortfall from the primary borrower can potentially be covered by a co-applicant. In some cases, a co-applicant with a higher income could help secure a larger loan amount than the applicant initially sought.
Enhances Repayment Capacity: If one of the applicants faces a financial loss, the other can cover for the EMIs payments. This potential to share repayment can reduce a lender’s risk and help boost the chances of approval.
What Banks Look for in a Co-Applicant
Banks look at both applicants equally when reviewing a joint application. The key criteria for a co-applicant are as follows:
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§ The co-applicant should be within the lender’s eligible age range. The age eligibility is usually between 21 and 60 years.
§ A credit score of 700 or more (the higher, the better)
§ Stable income and credit employment history
§ A healthy borrower’s DTI ratio (35 per cent or less ideally)
§ The two parties will also be required to submit their KYC and income documents in the application. If the loan is approved, they will be equally responsible for making timely repayments on the loan.
