Personal loan co-applicant: Can it increase your chances of getting a personal loan?

An individual has to fulfil the various eligibility criteria of the bank to get a personal loan. These include a good credit score, a steady career, a stable income source, a lower debt-to-income (DTI) ratio, etc. If the borrower doesn't fulfil any of the eligibility criteria, the bank may ask the borrower to get a co-applicant instead of outright rejecting the personal loan application. In this article, we will understand who is a co-applicant, and how getting one increases the chances of getting a personal loan.

Who is a personal loan co-applicant?

A personal loan co-applicant is an individual who applies for a personal loan along with the primary borrower. A co-applicant is also known as a co-borrower. A co-applicant shares an equal responsibility for the repayment of the personal loan. If there is a default, it affects the credit score and credit report of the primary borrower and the co-applicant.

A personal loan co-applicant can be the borrower’s relative, like a spouse, parent, sibling, or anyone else as per the bank rules. Bringing in a good co-applicant who fulfils the bank’s personal loan eligibility criteria boosts your chances of getting the personal loan application approved.

Benefits of a personal loan co-applicant

There are several benefits of having a personal loan co-applicant. Some of them include the following.

1. Creditworthiness boost: Is your personal loan application facing hurdles due to your lower credit score? In such a scenario, bringing in a co-applicant with a good credit score can boost the creditworthiness of your personal loan application. A co-applicant with a credit score of 750 or higher, and a good repayment track record will comfort the bank. The higher the co-applicant’s credit score above 750, the better.
2. Reduces the DTI ratio: If your debt-to-income (DTI) ratio exceeds a specified limit, the bank will be hesitant to approve your personal loan application. The DTI ratio measures the percentage of monthly income that goes towards servicing existing debts like loan EMIs and credit cards outstanding. Banks consider a DTI of 35% or lower as good for approving personal loan applications.                                                                                                                                                                                                                                       You should look for a co-applicant with a DTI ratio of 35% or lower. While processing your personal loan application, the bank will consider the DTI ratio of both applicants. Hence, a co-applicant with a lower DTI ratio will assure the bank that the free cash flow can comfortably cover the personal loan EMI repayment.
3. Increase in the loan amount: Is your monthly income lower than the bank’s minimum monthly income requirement criteria? In such a scenario, the co-applicant’s income can bridge the gap between the bank’s minimum monthly income requirement criteria and your monthly income.                                                                                                                                                                               Infact, if the co-applicant’s income is considerably high, the bank can consider offering you a personal loan of a higher amount than what you have applied for.
4. Improves repayment capacity: In a joint personal loan, the primary borrower and co-applicant have equal responsibility for the EMI payment. So, as a primary borrower, if you face any financial challenge in a particular month, the co-applicant can pitch in. Thus, with two individuals responsible for paying EMIs, it improves the personal loan repayment capacity.

How does a co-applicant increase the chances of a personal loan approval?

A co-applicant with a good credit score, stable monthly income, lower DTI, etc., can increase the chances of personal loan approval. A good credit score demonstrates creditworthiness. A stable monthly income provides assurances of steady monthly cash inflows. A lower DTI indicates sufficient free cash flows available for EMI payments.

The above are the factors that any bank looks for when considering the approval for a personal loan or any other loan. When you bring in a co-applicant that satisfies the above mentioned factors, the bank will have a certain degree of comfort. Thus, a good co-applicant can increase the chances of a personal loan approval.

Applying for a joint loan

When applying for a joint loan, the eligibility criteria for the co-applicant are usually the same as the primary borrower. Some of these include the following.

1. The co-applicant’s age should be within the minimum and maximum age bracket specified by the bank.
2. They should have a good credit score. Usually, a credit score of 700 and above is considered good for approving personal loan applications. The higher the credit score above 700, the better.
3. They should have a stable source of monthly income. The monthly income should be equal to or more than the specified minimum monthly income. The co-applicant must have a stable career with a specified minimum years of work experience.
4. Their DTI should be 35% or lower. Some banks consider a DTI between 36% to 50% and approve loan applications on a case-to-case basis.

Once the eligibility criteria are satisfied, you can go ahead and make the personal loan application along with the co-applicant. The co-applicant must submit the KYC and income documents. The bank will underwrite the joint loan application by considering the details of both applicants.

Once the personal loan is approved and disbursed, both applicants must ensure the EMIs are serviced on time. If an EMI is missed, it will adversely impact the credit scores of both the applicants. The bank will initiate the recovery from both applicants.

Should you bring in a co-applicant?

Whether you should bring in a co-applicant will depend on your circumstances. If you have a good credit score, a stable job, a decent monthly income, a lower DTI ratio, etc., you will not need a co-applicant. However, if you lag in fulfilling any of the personal loan eligibility criteria, you will need a co-applicant. You will need to identify which eligibility criteria you are lagging in. Accordingly, you will need to find a co-applicant who is strong in that area and can fill the gap. Thus, the right co-applicant can significantly boost your chances of getting a personal loan.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.