If you are a Co-Applicant for a Home Loan, you could face rejection from banks and NBFCs (Non-Banking Financial Companies) for future loans in case the main borrower defaults the loan payment. Usually, when you apply for a loan, banks check your credit score, and if it is low, they will reject your loan application. So, why does your credit score head south when you are co-applicant for a loan? It boils down to your credit exposure and utilisation.
As a borrower, you should be aware of how credit exposure and credit utilisation impact your credit score. Credit exposure refers to the overall credit that you have to your name. It includes all forms of credit, like Personal Loan, housing loan, auto loan, and Credit Card. On the other hand, credit utilisation refers to the total debt you have in comparison to your total earnings. It is indicative of your ability to repay your financial obligations.
When it comes to your credit score, nearly 30% of your score is based on your credit utilisation. So, if your credit utilisation is high when compared to your total earnings, it means that you have a lot of debt to your name, and if a lender extends further credit to you in the form of a housing loan or any other loan, you become a high-risk borrower. When you have high financial obligations in relation to your earnings, the chances of defaulting on the new loan increase. Hence, the lender decides that it is better to reject your loan application than to go ahead and extend the loan to you.
In India, your credit score is based on how you handle the repayments over a period of six months. Hence, if you already have high-interest loans to your name, it is prudent to close them first. When you do this, it reduces your credit utilisation and exposure, and as a result, your credit score will improve.
Once your credit score improves, you will be able to approach banks for a fresh loan. The chances of getting approval for the new loan will improve once the bank checks your credit report and see low credit utilisation.
If you are a co-applicant for a loan taken out by your friend or family member, it is essential you check your credit report periodically. For one, it will let you know that the actual borrower is making the payments on time and is not defaulting with the loan. In case the borrower is not keeping up with the repayment, your credit score too will be adversely affected along with the primary borrower’s score. It could pose a problem later on when you want to apply for a Home Loan or any other loan in the future.
Checking your credit report will also give you an idea what is dragging your credit score down. You can work on those aspects by making full or part payments to ensure it gives a boost to your score.
If you have a low credit score as a co-applicant to a loan and want a housing or any other type of loan, get in touch with the financial experts at MyMoneyMantra. They will give you valuable advice and tips on how to bring up your credit score and get approved for the loan.
Reshma Rawat is a passionate writer with a decade of experience in writing for a variety of domains (finance, technology, lifestyle, e-commerce, real estate, etc.). Currently, she is working as Assistant Manager - Content @MyMoneyMantra and writes blogs & webpages on financial products (loans, credit cards, insurance, government financial policies, mutual funds, etc.).
Director- MyMoneyMantra FinTech| A senior retail and commercial banking professional, adept at handling Business Development, Sales Planning & Growth, Product Strategy, Marketing Operations and Client advisory services phygitally.
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