What is a Co-Borrower? Their Role in Loan Documents
Loans can be valuable financial resources for covering various expenses. However, a high debt-to-income (DTI) ratio, low credit score, or unstable income may make them seem unattainable. If you add a co-borrower to your loan application, their income and credit score may increase your eligibility for a loan and help you achieve your goals.
The following sections will discuss the co-borrower's meaning, pros and cons, and role in loan documents.
What is a Co-Borrower?
A co-borrower is a person who signs the loan document with you and shares the joint responsibility for repayment. That means both you and your joint applicant are liable to repay the loan. Applying for a joint loan combines your forces to improve your chances of approval. For instance, if your income is low, the co-borrower's income will add to yours and improve your eligibility for the loan.
Read Also: Joint Loan Account: Here Is What You Need to Know
How Does the Co-Borrower Process Work?
Although the loan process remains the same for both solo and joint loan applications, the lender assesses applicants’ income, credit history, and DTI ratio to measure their eligibility. The difference is that both applicants are seeking the same loan. Here is how the process works:
- When you apply for a Personal Loan with a co-borrower, the lender considers both applicants' eligibility and the loan will appear on both applicants' credit reports.
- Both borrowers must provide their details and documents. The lender verifies the credentials of both applicants before approving the loan.
- In case of a default, the co-borrower shares the responsibility of repaying the loan.
Read Also: What is the Difference Between Co-signer and Co-applicant?
Benefits of a Co-Borrower
Let’s look at the advantages of having a co-borrower in your loan application:
- A joint loan application reduces the lender's risk and attracts favourable loan terms and conditions.
- It helps you get a loan if you were otherwise ineligible for one due to income, credit score, or other reasons.
- Adding a co-borrower increases the principal amount you can borrow as a loan.
- A joint loan application helps with the DTI ratio. If the co-borrower has a decent income with low debt, their eligibility can help you get better loan terms and conditions at competitive interest rates.
Advantages and Disadvantages of Using a Co-Borrower
Now that you understand what a co-borrower is, let’s look at the advantages and disadvantages of using one:
| Advantages | Disadvantages |
| Higher loan eligibility | Joint responsibility for loan repayment |
| Access to a bigger loan amount | Impact on the credit scores of both borrowers |
| Shared financial burden | Legal complexities in the case of a co-borrower’s demise or divorce |
| Lower interest rates and better approval chances | |
| Pool resources, such as the high credit score of one borrower and the decent income of the other |
Read Also: What is The Eligibility For a Joint Personal Loan?
Difference Between Co-Owner, Co-Borrower, Co-Applicant, and Co-Signer
Although the terms sound similar, they are different from each other in the following ways:
| Parameter | Co-Owner | Co-Borrower | Co-Applicant | Co-Signer |
| Meaning | An individual with a legal share in the property purchased with the loan | An individual who borrows a joint loan with the primary borrower | An individual who applies for a loan along with the principal borrower | An individual who signs the loan application along with the primary borrower to improve its eligibility |
| Debt Burden | Liable to share the debt burden | Shares the responsibility of repayment | Shared responsibility for loan repayment | Liable to repay the outstanding balance in case of default |
Read Also: How To Get A Personal Loan With A Co-Applicant
Impact of a Co-Borrower on Personal Loan Approval
When you apply for a Personal Loan, a co-borrower can impact your application in many ways, including the following:
- You can qualify for a bigger loan amount based on your joint income.
- The lender may offer you a loan at an attractive personal loan interest rate.
- You can use the co-borrower’s income and credit history to work in your favour.
Read Also: Personal Loan with a Co-borrower: Everything you need to know
Conclusion
Since a joint loan application significantly reduces the lender’s risk, you can qualify for a bigger loan at a competitive interest rate without hassle. However, ensure your good credit history to improve your loan approval chances. At Hero FinCorp, you can get a Personal Loan of Rs 50,000 to Rs 5 Lakh alone.
Frequently Asked Questions (FAQs)
1. Can a co-borrower be removed from a loan agreement?
Removing a co-borrower from a loan agreement is possible. However, the complex process requires consent from all the parties involved.
2. What documents are required for a co-borrower in a loan application?
The documentation requirements for a co-borrower remain the same as those for a sole borrower.
3. Is it mandatory to have a co-borrower for a Personal Loan?
Having a co-borrower when applying for a Personal Loan is not mandatory. However, adding one can increase your chances of getting approved with favourable rates and terms.
4. Can a co-borrower help in getting a lower interest rate?
Suppose the co-borrower has a decent credit score, high income, and low DTI ratio. In that case, you may qualify for a Personal Loan at a lower interest rate due to improved eligibility.