For many Indian families, securing a high-value loan like a home loan or a loan against property (LAP) is a significant financial step. Often, applying individually may not suffice. This is where a joint loan application becomes a strategic move, profoundly impacting both the primary borrower and the co-applicant's financial health and credit standing.
Why Opt for a Joint Loan Application?
Financial institutions frequently recommend or even mandate a joint application for substantial loans. This is common when the property is jointly owned, serving as a critical risk mitigation measure for the lender. An individual can apply jointly with a spouse, parent, sibling, or another eligible relative. The core advantage lies in pooling financial strengths to meet the bank's stringent eligibility criteria.
If the primary borrower's income is insufficient or their debt-to-income (DTI) ratio is high, a co-applicant with a stable, good income can alleviate the bank's concerns about repayment capacity. More importantly, a co-applicant with a strong credit score (typically 750 and above) can significantly bolster the application's chances. During underwriting, lenders scrutinize the credit profiles of both applicants. A high score from a co-applicant can offset a weaker profile, turning a potential rejection into an approval.
The Credit Score Impact: A Shared Responsibility
A joint loan is a powerful tool for credit building, but it comes with shared liability. The repayment history is meticulously recorded in the credit reports of both the primary borrower and the co-applicant. Timely EMI payments benefit both parties, positively contributing to their credit scores. Payment history holds substantial weight in credit scoring models used by agencies in India.
However, this shared responsibility is a double-edged sword. Any delay or default in EMI payment negatively impacts the credit scores of both individuals. If an EMI remains unpaid for over 90 days, the loan is classified as a non-performing asset (NPA), and both applicants are tagged as defaulters in their credit reports as per RBI guidelines. This black mark can hinder future credit access, leading to higher interest rates or demands for collateral.
Choosing the Right Co-Applicant: An Opportunity or a Pitfall?
The choice of co-applicant is crucial. While a strong co-applicant opens doors, a co-applicant with a poor credit score (below 650) can drastically reduce approval odds. Even if approved, it may result in less favourable terms like a higher interest rate or a reduced loan amount. Lenders assess the combined profile, so one weak link affects the joint application.
Therefore, agreeing to be a co-applicant requires careful consideration. It is an opportunity to help a family member and build one's own credit history. Yet, it demands vigilance, as the co-applicant is equally liable for repayment. One must be confident in the primary borrower's financial discipline or be prepared to step in to protect one's own credit score.
In essence, a joint loan can be a ladder to financial goals and a stronger credit profile for two individuals. Conversely, it can become a shared burden if not managed with utmost responsibility and timely payments. Weighing these pros and cons is essential before entering into such a significant financial partnership.
