Co-signing a loan is a huge responsibility and can impact you greatly. Here's what you need to know before your generous streak gets the better of you!
In this dog-eat-dog world if you have agreed to co-sign a loan with somebody, you are incredibly generous! But if you have done so purely because you have been swayed by emotions, stop right now.
A mortage is a huge commitment and if you have been approached by a family member or a friend to come in as a co-signee, do not go ahead and do so, just because you have blind faith on the person concerned. He or she may be very dear to you, but when it comes to taking on financial commitment for a considerable period of time, you can never be too sure. You must first be aware of the responsibilities of a co-signer and understand that if things go wrong you are as liable for the repayment of the home loan as much as the borrower.
Consider the following things, before you agree to co-sign on a home loan application.
The responsibility and risks
Co-signing a home loan does not mean that you merely go and sign on a document that your relative or friend has urged you to. You may think of it as a good will exercise, but what you are effectively doing is taking up as much responbility as the primary borrower when you agree to sign that document. This means that if anything goes wrong as far as the repayments are concerned, you are going to be held equally responsible for the same and will be asked to make the repayment on behalf of the borrower.
What's more is that if you do not have the requisite funds to make the repayments like the borrower, your CIBIL score will take a major hit. A poor CIBIL score and the blemish of non-payment on your CIBIL report will close doors for you when you may be in need of a loan.
If the bank has insisted that the primary borrower bring in a co-signee on the loan, it's a signal for you to stay away in the first place. More often than not, banks insist on a co-signee, if the CIBIL score of the primary borrower is not satisfactory.
This is indicative of the fact that the primary borrower's credit history is not something that you vouch for and despite his many assurances about his prospects, there may be chance that he may turn defaulter at a later date! Therefore be absolutely sure before you go ahead and sign on his home loan application as a co-signee.
The terms and conditions
Once you are aware of the risks involved in co-signing a loan and still decide to go ahead with it, make the attempt to understand the full terms and conditions of the loan. Be aware of things such as the total amount being disbursed, interest rates, due dates each month and whether or not there are other facilities such as a grace period for payments.
This is to make sure that you are not taken by surprise if something untoward happens that renders the primary borrower incapable of re-paying the home loan.
Negotiating with the bank
If you have agreed to co-sign on a home loan application, you have as much right to negotiate on the terms and conditions of the repayment as much as the primary borrower. If you have a good CIBIL score and a credit history that is remarkable, it puts you at a vantage point to negotiate as well. You could also ask the bank to send you all written communication that goes out to the primary borrower so that you can ensure there are no missed payments.
Plan an exit strategy
Let us reiterate that you are as responsible for the home loan as the primary borrower, when you co-sign on a home loan. Therefore you must have an exit strategy in mind as well.
Ideally you should be saving funds in a separate account that will help you make the repayments in case the primary borrower is unable to do so. Do bear in mind that in India, once you co-sign a loan, the bank does not exonerate you of your responsibilities, even if you have a change of heart later.
Therefore, in case there is a default, both the primary borrower and you will be in trouble and you both will take a hit on your CIBIL score.
In conclusion therefore it will be no exxagaration to state that co-signing a home loan is as good as taking one yourself, so unless you are completely sure that you want to go ahead with it, tread with caution. When it comes to financial matters, it is best to let your head rule over your heart!
Photograph: Olivier/Creative Commons
The author is Co-founder and Director Credit Vidya.