How does a credit score work in case of joint loan applications? Find outnews24

In this article, we will understand how a joint loan application helps, and its impact on the credit score and report of both borrower and co-borrower. Also, how two individuals can apply for a loan as a co-applicants. Usually for higher amount loans like a home loan or a Loan Against Property (LAP), it is advisable to make a joint loan application rather than applying individually.

In such cases, usually the credit institution also insists on a joint loan application as it has benefits over an individual loan application. An individual can make a joint loan application with his/her spouse, sibling, parent, etc. Also, if a property is jointly owned, the bank will seek a joint loan application mandatory as a risk mitigation measure.

How does a joint loan application help?

A strong co-applicant can help the primary borrower fulfil the bank’s loan eligibility criteria and increase the chances of loan approval. If the primary borrower’s monthly income is low or the debt-to-income (DTI) ratio is high, the bank will be concerned about the loan repayment. A co-applicant with a good income can allay the bank’s loan repayment concerns.

If the primary borrower’s credit score is lower than the bank’s requirement, a co-applicant with a good credit score can strengthen the loan approval chances. While underwriting the joint loan application, the credit institution does an inquiry on the credit profiles of both the loan co-applicants. Hence, you bringing in a co-applicant with a good credit score of 750 and above helps. The higher the credit score, the better is the chances of approval.

If the credit institution asks you to get a co-applicant, you should look at it as a risk mitigation measure from their side. The joint loan is an opportunity for you to build your credit score and profile further with regular timely EMI payments. Over time, once you build a good credit score and report, you can take loans on your own.

Joint loan: Both borrowers are equally responsible for repayment

In a joint loan, the repayment track record will be reflected in the credit reports of both borrowers. So, if you are a co-applicant, you must ensure the primary borrower makes the timely EMI payments. When that happens, both of you will benefit. The timely EMI payments will contribute towards improving the primary borrower’s and your credit score. Timely payment of loan EMIs and credit card bills has greater weightage in the credit scoring models that computes an individual’s credit score.

The other factors include the extent of credit utilisation of your credit card limits. Lower the utilisation, the better the impact on credit scores. Besides, a good mix of secured and unsecured credit, high velocity of enquiries simultaneously or within a short period, vintage of loan repayment among many.

In a joint loan, while both borrowers benefit with timely EMI payments, the opposite is also true. If the primary borrower doesn’t pay on time, the co-applicant is liable to pay. The lending institution is empowered to initiate recovery proceedings against both borrowers.

Any delays in the payment of EMIs will impact the credit score of both borrowers (primary and co-applicant). The credit score may deteriorate and will take time to recover with timely payments in future. This may affect your chances of securing any new loan and/or credit card. Even if a lending institution extends credit, it may come at a higher interest rate. The lender may seek a collateral or a guarantor to strengthen your application.

Impact of default on credit score and report

If the EMI payment delay is over 90 days, the bank will classify the loan as an NPA and the borrower as a defaulter as per RBI guidelines. The loan default status will reflect in the borrower’s credit report and leave a trail in the report.

In a joint loan, the default status will reflect in the primary borrower’s and co-applicant’s credit report. Hence, if you are a co-applicant in a joint loan, it is equally your responsibility to track and ensure the regular EMI payment by the primary borrower.

Joint loan: Opportunity or challenge?

Well, a joint loan can be an opportunity or a challenge. It is an opportunity as it helps both the loan applicants to build a good credit score and a strong credit report. However, if there are EMI payment delays / defaults, it can affect the credit score and report of both applicants. Hence, if you decide to be a co-applicant in a joint loan, you must weigh the pros and cons and take a prudent decision to be a part of the loan.

Sachin Seth, Chairman CRIF High Mark and Regional MD CRIF Indian & South Asia